S. Hrg.

105860

AN INDUSTRY VIEW OF THE SATELLITE EXPORT

LICENSING PROCESS

HEARING
BEFORE THE

SUBCOMMITTEE ON INTERNATIONAL SECURITY,

PROLIFERATION, AND FEDERAL SERVICES
OF THE

COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

JULY 29, 1998

Printed for the use of the Committee on Governmental Affairs

(
U.S. GOVERNMENT PRINTING OFFICE
50653 CC WASHINGTON : 1999

For sale by the Superintendent of Documents, Congressional Sales Office

U.S. Government Printing Office, Washington, DC 20402
 COMMITTEE ON GOVERNMENTAL AFFAIRS
FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, JR., Delaware JOHN GLENN, Ohio
TED STEVENS, Alaska CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine JOSEPH I. LIEBERMAN, Connecticut
SAM BROWNBACK, Kansas DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi ROBERT G. TORRICELLI, New Jersey
DON NICKLES, Oklahoma MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania
HANNAH S. SISTARE, Staff Director and Counsel
LEONARD WEISS, Minority Staff Director
LYNN L. BAKER, Chief Clerk

SUBCOMMITTEE ON INTERNATIONAL SECURITY, PROLIFERATION AND

FEDERAL SERVICES
THAD COCHRAN, Mississippi, Chairman
TED STEVENS, Alaska CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico RICHARD J. DURBIN, Illinois
DON NICKLES, Oklahoma ROBERT G. TORRICELLI, New Jersey
ARLEN SPECTER, Pennsylvania MAX CLELAND, Georgia
MITCHEL B. KUGLER, Staff Director
LINDA J. GUSTITUS, Minority Staff Director
JULIE A. SANDER, Chief Clerk

(II)
 CONTENTS

Page
Opening statement:
Senator Cochran ............................................................................................... 1
Senator Levin .................................................................................................... 7
Senator Stevens ................................................................................................ 8
Senator Specter ................................................................................................. 9
Senator Cleland ................................................................................................ 9
Senator Thompson [ex officio] ......................................................................... 10
Senator Durbin ................................................................................................. 12

WITNESSES

WEDNESDAY, JULY 29, 1998

C. Michael Armstrong, Chairman and CEO, AT&T, and Chairman, Presi-
dents Export Council ........................................................................................... 2
Steven D. Dorfman, Vice Chairman, Hughes Electronics .................................... 12

ALPHABETICAL LIST OF WITNESSES

Armstrong, C. Michael:
Testimony .......................................................................................................... 2
Prepared statement .......................................................................................... 47
Dorfman, Steven D.:
Testimony .......................................................................................................... 12
Prepared statement .......................................................................................... 54

APPENDIX
Letters dated September 7, October 21, October 29, and November 16, 1993
from C. Michael Armstrong, Chairman and Chief Executive Officer,
Hughes .................................................................................................................. 62
Article from the Washington Post, dated July 5, 1998, entitled Blueprint
for a China Policy ............................................................................................... 68
Letter dated October 8, 1997 to the U.S. Department of Commerce from
M.E. Mersch, Manager, Export Compliance, Hughes Space and Communica-
tions Company ...................................................................................................... 70

(III)
 AN INDUSTRY VIEW OF THE SATELLITE
EXPORT LICENSING PROCESS

WEDNESDAY, JULY 29, 1998

U.S. SENATE,
SUBCOMMITTEE ON INTERNATIONAL SECURITY,
PROLIFERATION, AND FEDERAL SERVICES,
OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:02 p.m. in room
SD342, Senate Dirksen Building, Hon. Thad Cochran, Chairman
of the Subcommittee, presiding.
Present: Senators Cochran, Domenici, Specter, Stevens, Levin,
Durbin, Cleland, and Thompson [ex officio].
OPENING STATEMENT OF SENATOR COCHRAN
Senator COCHRAN. The Subcommittee will please come to order.
I would like to welcome everyone to todays hearing of our Gov-
ernmental Affairs Subcommittee on International Security, Pro-
liferation, and Federal Services. Our subject today is An Industry
View of the Satellite Export Licensing Process.
This hearing is a continuation of our Subcommittees review of
the export control policies of this administration to determine if
they were designed and administered to protect our national secu-
rity interests as well as to promote exports.
We have recently concentrated specifically on the commercial sat-
ellite industry because of the proliferation concerns that surround
the transfer of militarily useful missile and satellite technology
that can occur when our U.S.-manufactured satellites are exported
to or launched by other countries.
We have learned from witnesses that, in the process of launching
a satellite, technology can be transferred to other countries, such
as China, that could be useful in improving their space launch ve-
hicles and ballistic missiles. This is particularly troubling when
these other countries have sold missiles or missile components to
hostile, rogue nations for delivering weapons of mass destruction.
The experience and perspectives of the U.S. business sector must
be taken into account as we try to understand all sides of this
issue. Therefore, the viewpoint of current and former executives of
the Hughes Electronics Corporation, one of the leaders of the aero-
space industry, will be heard today.
Were pleased to have before the Subcommittee two distinguished
officials who have served in the highest offices of Hughes Elec-
tronics Corporation, C. Michael Armstrong and Steven D. Dorfman.
(1)
 2

Mr. Armstrong is chairman and chief executive officer of AT&T

Corporation and chairman of the Presidents Export Council, and
he is the immediate past chairman and chief executive officer of
Hughes Electronics Corporation. Mr. Dorfman is vice chairman of
Hughes Electronics Corporation. He has been with the company
since 1957.
Gentlemen, we appreciate very much your attendance and your
assistance to our Subcommittee. We have copies of your prepared
statements, which we thank you for and we will include in the
record in their entirety at this point. We invite you to make what-
ever comments you would like to make, summarizing your state-
ment or reading it, as you like.
Mr. Armstrong, you may proceed.
STATEMENT OF C. MICHAEL ARMSTRONG,1 CHAIRMAN AND
CEO, AT&T, AND CHAIRMAN, PRESIDENTS EXPORT COUNCIL
Mr. ARMSTRONG. Thank you, Chairman Cochran, and Senator
Stevens.
I appreciate the opportunity to participate in this hearing on in-
dustrys view of the commercial satellite export process.
It appears there are currently three issues being examined on
the commercial satellite export licensing process. One, what is the
right jurisdiction for export licensing of commercial communicating
satellites. Two, was the process violated due to the handling of the
Loral launch failure analysis report. And three, did campaign con-
tributions influence the process.
Mr. Chairman, let me state first, foremost and unequivocally
that as a recent past chairman of Hughes, I know that its leader-
ship, its people, its values and its technology are firmly committed
to the national security of the United States of America. So much
of this companys life, history and future are dedicated to that pur-
pose, that Hughes would never endanger the security of this coun-
try.
In response to the last question on campaign contributions, as I
recall, my only Presidential contributions were $1,000 to George
Bush in 1991, and, though frankly, I didnt recall it until preparing
for this hearing, $1,000 as well to Bill Clinton in 1995. And
Hughes, while I was chairman, contributed only PAC money, split
about 5050, between the political parties.
Regarding the handling of the Loral failure analysis, I have no
personal knowledge of how the Loral failure report was handled. I
was aware that two Hughes scientists were on the Loral team but
have no personal knowledge of what function they performed.
As to the correct jurisdiction for export licensing of commercial
communicating satellites, my response is that its in the Commerce
Department and thats where it should be. From August 1993 to
1996, I worked to convince many in Washington to transfer com-
mercial communicating satellites from the munitions list, where
they are under State Department jurisdiction, to the commerce con-
trol list which is administered by the Commerce Department.
Theres a fundamental reason for this. I felt strongly, and still
feel, that commercial communicating satellites are not munitions,
1 The prepared statement of Mr. Armstrong appears in the Appendix on page 47.
 3

and should not be treated by the government as if they are. Doing

so has in the past only hurt American companies and helped our
foreign competitors. And in the end, after a long and careful re-
view, the U.S. Government ultimately agreed. May I explain why
I believe our government made the right decision.
First, all satellites are not the same. Some satellites can perform
tasks that should not be considered for export. Hughes and others
build these only for United States national security interests.
However, a commercial communicating satellite performs no
tasks that are a threat to our national security interests. A com-
mercial communicating satellite is the equivalent of a telephone
wire or a television cable. The satellite only enables video, voice
and data that transmits up to reflectors in the sky and down to re-
ceivers on the ground. Its like a big mirror that reflects commu-
nications.
It competes with wires and cables and cellular. In fact, commer-
cial communications satellites carry television, fax, e-mail and te-
lephony that today are doing so much to open societies and bring
people around the world closer together.
For example, back in 1972 when President Nixon went to China,
Hughes deployed its satellite resources into China to broadcast to
the world this historic American step to begin the opening of
China. It was a big step in history, not only because President
Nixon was there, but because Hughes and its satellites enabled us
all to be there.
However, besides being convinced that a commercial commu-
nicating satellite is a commercial product and is not a munition, a
little history may explain why I worked for consideration to move
jurisdiction to the Commerce Department. When I joined Hughes
as chairman in 1992, America had won the cold war. The Defense
budget was being cut in half. And this proud defense firm had to
lay off tens of thousands of people, people whose only reason for
their layoff slip was that they had worked hard and successfully to
our victory.
People were devastated. Los Angeles was suffering economically
and the company was in serious decline. We had to change and
change fast. Change from mostly defense to commercial, change
from primarily domestic to global, change from being technology-
driven to market-driven, and change from mainly government sat-
ellites to also commercial satellites. And Im proud to say, change
we did.
As borders around the world came down, as societies opened, as
countries sought to participate in the global economic order, they
needed a communications infrastructure to participate commer-
cially. Commercial communicating satellites are essential in doing
that job.
Our commercial satellite backlog began to grow as we invested
to expand our commercial satellite products and modernize our fac-
tory. Then in August, 1993, we were notified the State Department
had implemented category 2 MTCR sanctions against China. I
learned that this meant we could not export commercial satellites
to China for launch or for use.
As a result, two of our customers in Australia and Hong Kong
who had selected China launches could not launch. In addition, the
 4

two satellites we were building for Chinas banking system, worth

approximately $100 million, were canceled and given to our com-
petitor, DASA, in Germany.
This was followed by China canceling a memorandum of under-
standing that could potentially have totaled over a billion dollars
of satellite work. They also gave that to DASA. China simply re-
placed American-built satellites with German-built satellites.
China was not hurt, but America was.
Billions of dollars lost, thousands of jobs affected, and an uncer-
tain future at a very critical time. Of course, I wondered how the
American workers and companies building a commercial product
got singled out by these sanctions. And I wondered, what was the
rationale to internally penalize when trying to influence external
errant behavior.
I learned that the State Department judged the commercial com-
munications satellite to be the munitions list items due to embed-
ded technology. I never learned why satellites were singled out,
since there are other products with embedded technology. And I
never understood why penalizing our countrys exports made any
sense versus punishing the errant countrys export to us.
So with Hughes people being laid off by the thousands, with the
company trying to survive the cold war victory, with our sitting in
double digit unemployment and slowly climbing back from riots as
we worked to rebuild Los Angeles, something had to be done. We
needed help from Washington.
About that time, December 4, 1993, President Clinton came to
Los Angeles to see and learn about the economic problems of
Southern California. I was asked to participate with a group in an
economic roundtable with the President. This was a very open and
public roundtable, in fact, it was televised on CSPAN.
When it came my turn to speak on what could be done to help
Southern California, I shared the plight of the thousands of work-
ers affected due to the application of sanctions to our commercial
satellite products. The President agreed to look into the situation.
However, besides just asking the President, I thought it was nec-
essary to share our situation with Congress and the Federal agen-
cies involved, and to respond to any questions or concerns. So I
went to Washington in pursuit of four objectives.
One, to promote an understanding that a commercial commu-
nicating satellite was not a munition and did not belong on the mu-
nitions list. Two, to request permission to let the Australia and
Hong Kong companies launch their satellites. Three, to explain
why the satellite embedded technology was secure, protected,
guarded and not a national security risk if launched from China.
And four, to obtain predictability in the licensing process, to seek
support to transfer commercial communicating satellites from State
Department munitions list to the Commerce Departments com-
merce control list.
Before setting up these Washington appointments, I again re-
viewed the security implemented in our China launches, and the
review confirmed that the satellite was boxed, freighted and locked
for shipment. That Hughes people accompanied and oversaw all
handling and storage, that the satellite, upon arrival at the launch
site, was under lock and that we had continual video surveillance
 5

of the satellite. And that the mounting of the satellite on the rocket
was under our surveillance, and that there was no opportunity for
access, intrusion, or understanding of the embedded technology.
So I came to Washington to share my story. And I met with Dr.
Bill Perry, Secretary of Defense; Jim Woolsey, Director of the CIA;
Mickey Kantor and Charlene Barshefsky, USTR; Admiral McCon-
nell, NSA; Senator Sam Nunn; Secretary Lloyd Bentsen; Secretary
Ron Brown; Sandy Berger, National Security Advisor; Bob Rubin,
National Economic Advisor; Peter Tarnoff, Under Secretary of
State; Senator John McCain; Speaker Newt Gingrich; Senator
Diane Feinstein; Congressman Toby Roth; Congresswoman Jane
Harman and many members of the California delegation, as well
as numerous others.
During each of these discussions, I would pursue two questions.
Would you agree that a commercial communicating satellite is a
commercial product, and not a national security risk? And if you
are asked to get involved, would you give your support for jurisdic-
tion transfer?
After discussion, no one expressed disagreement with the expla-
nation, and I left believing I had their support. Indeed, 30 members
of the California delegation of both parties signed a letter to Sec-
retary Christopher in support of excluding commercial satellites
from any list of sanctionable items. Certainly the situation was
known, it was openly discussed, and I was encouraged by the sup-
port and the lack of opposition from those that I spoke with.
I spoke out publicly. I testified before the Congressional com-
mittee which was rewriting the Export Administration Act. And I
wrote letters to government officials. In addition, since 1994, I have
had the honor of chairing the Presidents Export Council. The PEC,
as it is most often called, is comprised of nearly 50 men and women
drawn from business, industry, agriculture and labor as well as
from the executive and legislative branches.
By charter, the PEC advises the President and the government
on export matters and recommends ways of expanding U.S. ex-
ports. Our goal is to find ways to promote American exports, to
identify any problems and to recommend solutions. As intended,
the PEC has advised the government on a full range of issues re-
garding the expansion of Americas exports, including submitting a
report on unilateral sanctions prepared by PECSEA. The PECSEA,
a separately chartered subcommittee on export administration,
which is chaired by Michael Jordan of Westinghouse, and now of
CBS, also addressed the question of commodity jurisdiction with
the PEC.
Also, I was on Secretary of State Warren Christophers advisory
council. And I asked the Secretary if he would review the sanctions
process, or really a lack of a sanctions process, and he agreed to
initiate a review.
The Secretary never told me the outcome of his review. Of
course, I learned later that the President, in consultation with his
cabinet and advisors, approved the change in jurisdiction to Com-
merce. And I believe this was the right decision.
But there is a key question. Did it work? Was it worth it to
transfer jurisdiction from State to Commerce? The answer is yes.
I believe this change in jurisdiction, moving commercial commu-
 6

nicating satellites from the munitions list to the commerce control

list sent three messages around the world. One, that the United
States would not compromise its nonproliferation principles. MTCR
sanctions did not change, and wrong behavior still brings U.S.
sanctions.
Two, that the U.S. has not compromised its national security.
The process and U.S. agencies are in place to protect it. If the proc-
ess needs to be tightened, this country, this Congress, the compa-
nies involved, can tighten it. There must not be any question that
the satellite licensing and failure review processes assure our na-
tional security.
And three, that the countries that need commercial commu-
nicating satellites to open their society internally and compete in
the world economic order externally can now have more confidence
in buying U.S. commercial communications products.
Certainly, the results support that the communications market is
there and this change has helped U.S. companies participate. U.S.
satellite exports are growing, and the prospects for continued U.S.
satellite leadership are supported by the industrys commercial
growth.
As were discussing these three important issues, I hope this
Subcommittee will keep in mind the underlying reasons U.S. com-
panies have been forced to look overseas for launch capacity. The
failure to develop a U.S. launch industry had resulted in an inad-
equate launch capacity to meet worldwide demand for commercial
satellites. The two main launch providers, Lockheed Martin in the
United States, and Frances Arianne, did not plan to invest to ex-
pand capacity. China and Russia have U.S.-imposed launch quotas,
and the United States was not interested in investing in additional
launch capacity.
Therefore, to expand U.S. launch capability, Hughes initiated
and committed hundreds of millions of dollars in future launch con-
tracts, future contracts, so that McDonnell Douglas would develop
the new Delta 3, and Boeing the new Sea Launch. As a result of
Hughes initiatives, new U.S. launch technology is being developed,
a more competitive market is unfolding. U.S. launch supply is
going up, and launch lead times are coming down.
It was Hughes that took the risk, that committed the capital, to
improve this countrys launch technology capability. But in my
opinion, the need for further investment in U.S. rocket systems and
alternative launch technologies is still warranted.
In summary, Mr. Chairman, I submit Hughes would not and did
not violate any national security interests or process. The commer-
cial communicating satellite is not a munition and does not belong
on a munitions list. As a commercial product and with embedded
technology fully protected, commercial communicating satellites be-
long on the commerce control list administered by the Commerce
Department.
If the licensing or failure review process needs to be tightened,
government and industry should tighten them. And if this country
is concerned about its rocket and launch technology, then we must
invest in it, just as Hughes did.
I hope that this provides the Subcommittee with an under-
standing of the problems we faced and my efforts to seek, by peti-
 7

tioning the decision makers in Washington, an appropriate solu-

tion. Thank you for listening to me.
Senator COCHRAN. Thank you for your statement, Mr. Arm-
strong.
Before proceeding to hear from Mr. Dorfman, Im going to yield
to the distinguished Senator from Michigan, the Ranking Member,
for any opening statement he might have to make, and then to
other Senators who are here as well.
Senator Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Thank you, Mr. Chairman. And thank you for
holding these hearings. Weve had numerous hearings over the past
few months that have examined the issue of whether the current
export control process for communications satellites is adequate to
protect our national security and to promote our national interests.
Under the current system established by executive order in 1995,
and made effective in 1996, the Department of Commerce issues li-
cense for exports of U.S.-made satellites through a multi-step proc-
ess that both requires interagency agreement and provides for a
multi-level appeal process when full agreement isnt reached. Each
agency, including the Departments of State, Defense, Commerce
and Energy, and ACDA, the Arms Control Disarmament Agency,
has an opportunity to object to the issuance of the communications
satellite license and the decision to license can ultimately be ele-
vated by any of those agencies to the President.
Companies like Hughes lobbied to get communications satellites
off the State Department munitions list where they were subject to
State Department licensing and onto the commerce control list be-
cause they wanted greater certainty and a quicker timetable on
their business operations. Unlike the State Department, when it
comes to export licenses, Commerce operates openly and with dead-
lines. Items on the commerce control list are not subject to auto-
matic sanctions in the event a country violates our anti-prolifera-
tion policy. Moreover, no other country treats communications sat-
ellites as munitions.
But the telecommunications industry was not the only voice that
was heard in the Executive Branch advocating this position a few
years ago. Congress, in 1993, also expressed its interest in modi-
fying the export control process for communications satellites. In a
letter dated September 20, 1993, to the President, then House Mi-
nority Whip Gingrich, then Majority Leader Gephardt, the chair-
man and ranking member of the key trade Subcommittee in the
House, Sam Gejdenson and Toby Roth, respectively, urged dra-
matic reform in U.S. export control policy to enhance the ability
of the United States to compete overseas.
The letter explains that by imposing controls we are limiting the
ability of the American businesses to export some of their most
marketable items. The letter goes on to recommend the decontrol
of all telecommunications equipment for civilian end users, and in
closing, the authors ask the President, to take the immediate
steps necessary to remove these unnecessary and burdensome ob-
stacles to U.S. competitiveness.
 8

Some may want to attribute sinister motives to those who lob-

bied hard for communications satellites to be licensed by the Com-
merce Department. And there are some who argue that satellite li-
censing decisions made by the Clinton administration were affected
by campaign contributions. Yet the witnesses here today are per-
sons who helped lead the effort to change the licensing process, to
assist their businesss ability to compete. Individually and as a
company, they gave campaign contributions almost equally to both
parties.
Whats really at issue here is a public policy question. By pre-
venting our own companies from selling their latest equipment
abroad, when companies in other countries are eager to take up the
slack, are we protecting or hurting our national interests? Is place-
ment of satellite licensing in Commerce, with the additional control
by executive order, a good one with respect to our national inter-
est?
How we balance our interest in protecting our technology with
our interest in selling our technology is no easy answer. And there
are legitimate arguments on both sides of the issue. We have four
or five committees in the Senate alone probing those questions.
Today, we have the opportunity to hear the views of one of the
major companies in the telecommunications industry, and the in-
sights of our witnesses developed during years of experience in
manufacturing and selling U.S.-made satellites internationally, and
lobbying Congress and the Executive Branch will be valuable to the
Senate as we grapple with this issue.
And again, I want to thank you, Mr. Chairman, for your leader-
ship in this area.
Senator COCHRAN. Thank you, Senator Levin.
Senator Stevens.

OPENING STATEMENT OF SENATOR STEVENS

Senator STEVENS. Mr. Chairman, Im pleased I was able to come
and hear this statement by Mr. Armstrong, because I have had
some questions in the past about this practice, not about the export
of commercial satellites, but about the definition of what is a com-
mercial satellite. I think that Mr. Armstrong properly raises the
question of having that defined by our security people, rather than
having it defined by the State Department in terms of a munitions
list thats not applicable, obviously, to commercial satellites.
And I think that it is a very timely subject, because were going
to have this amendment on the Floor tomorrow, Im sure you know,
concerning the question of where that authority should be, whether
it should be in the State Department or the Commerce Depart-
ment.
I do believe we have to draw the line between those satellites
which have embedded technology which is highly classified and
those that have embedded technology which unfortunately is in the
whole range of things. I had one of the computer experts of the
country, if not the world, tell me the other day that we have em-
bedded technology in ovens and in the thermostats and even in
some of the small objects we take for granted, such as our fax ma-
chines and our machines to print out the product of our computers.
 9

It is not an easy question. We must protect our national security.

But I believe Mr. Armstrong has made the point about protecting
our commercial ventures overseas, too. So I congratulate you for
your statement, and I thank you very much.
Senator COCHRAN. Thank you, Senator Stevens.
Senator Specter, do you have an opening statement? We are in-
terrupting our witnesses to take opening statements from any Sen-
ators at this point.
OPENING STATEMENT OF SENATOR SPECTER
Senator SPECTER. Thank you very much, Mr. Chairman.
I would like to make a few comments, and shall be relatively
brief. I commend you, Senator Cochran, for chairing these hear-
ings, and your initiative on this important matter.
As we all know, Justice and Pentagon officials have advanced the
proposition that during the exchange of information, Loral may
have given the Chinese restricted information that could improve
the guidance system of their rockets. This is similar technology to
that which guides long range nuclear missiles to their targets.
When Mr. Armstrong has testified that a commercial commu-
nicating satellite performs no tasks that are a threat to our na-
tional security interests, as I understand it, he has taken up only
one aspect of that capability inherent in the satellite itself. There
are a couple of other factors. Technological know-how that can be
transferred in the process of ensuring the satellite and launch vehi-
cle are properly integrated before launch, and in the case of a fail-
ure, recovery of useful satellite components and using the launch
failure analysis to perfect the countrys ballistic missiles.
The testimony also relates to discussion with the President and
others in Washington on the economic impact to Hughes of the Au-
gust 1993 MTCR munitions technology control regime imposed
against China. I think its of interest to the Subcommittee to know
about any discussions with Chinese officials, about the relationship
between the sanctions and their proliferation behavior.
Then there is the overarching question, although not touching
Mr. Armstrong, the issue that has been before this full Committee
in some detail on campaign finance reform about Lorals chairman
and CEO, Bernard Schwartz, and the large contribution which he
made and the largest personal contributor to the Democratic Na-
tional Committee last year.
So there are a number of very important issues which we have
to take up. Im delighted to see Mr. Armstrong and Mr. Dorfman
here today. Not unexpectedly, I have other commitments, so Ill be
submitting a number of questions in writing. Thank you very
much.
Senator COCHRAN. Thank you, Senator Specter.
Senator Cleland, we have interrupted our witnesses testimony
for any opening statements from Senators. You are recognized for
that purpose, if you would like to make a statement at this time.
OPENING STATEMENT OF SENATOR CLELAND
Senator CLELAND. Thank you very much, Mr. Chairman.
Id like to thank you for taking the time to continue the examina-
tion of the adequacy of satellite export controls. An issue of this
 10

magnitude certainly requires a thorough investigation before any

conclusions can be reached. We have previously heard testimony
from the Departments of Commerce, State, and Defense on this
issue. Safeguarding our national security interest while striving for
economic growth can be a challenging balance to achieve.
Mr. Chairman, all three of the departments have discussed the
procedures in the licensing process and the obligation industry in-
curs in protecting militarily sensitive technology. Earlier this year
the news broke regarding allegations that Loral and Hughes pro-
vided technical information to China, triggering widespread con-
cern about the question of technology or technical expertise being
transferred to China.
There is, however, disagreement as to the extent of such trans-
fers and their impact on our national security. For example, con-
cern was raised regarding three satellites launched by Hughes in
1995 and 1996 which were not monitored by the Department of De-
fense personnel. Satellites did not require the State Departments
license and monitoring had been tied to licenses for munitions list
items.
Ideally, we would like to create policies and procedures that
would preclude every possibility for the potential of militarily sen-
sitive technology transfer or any other disastrous outcome. Unfor-
tunately, thats not realistic. Then how do we ensure against tech-
nology transfer or any compromise to national security? Ill be
interested in what our witnesses have to say in regard to that,
some of your ideas. Well appreciate those ideas.
A critical part of investigating this issue is to address improving
our export control policies and procedures as well as exploring the
immediate response required should, say, an incident occur. What
lessons have we learned and how can we use them to improve the
way we conduct business?
Its interesting to me that on June 22 of this year in that issue
of Defense Daily, Major General Robert Scales, Commandant of the
Army War College, was noted to have said that China is the top
visitor to the Fort Leavenworth Center for Army lessons learned
web site. Well, if China is willing to learn from our shortcomings,
perhaps we can, too.
I look forward to hearing from our witnesses, and Mr. Chairman,
again, thank you very much for these hearings. In terms of cam-
paign finances, Im an original co-sponsor of efforts to reform our
ways in which we raise money in terms of running for offices in
this Congress.
Thank you very much, Mr. Chairman.
Senator COCHRAN. Thank you, Senator Cleland.
Senator Thompson.

OPENING STATEMENT OF SENATOR THOMPSON

Senator THOMPSON. Thank you very much, Mr. Chairman. I ap-
preciate your continued leadership in this important matter. Youve
been dealing with this issue for some time, in fact, some time be-
fore many people were paying much attention to it in terms of
overall proliferation policy and issues. And I appreciate that very
much.
 11

I do think what were dealing with here today is within the

broader context of our relationships to countries such as China and
Russia. I certainly have no quarrel with a business that is in busi-
ness to make money by legitimate means however they can. You
owe it to your stockholders. I expect you to be a forceful advocate
for the things that you believe which will also put money into the
pockets of the corporation. The missile business, or the satellite
business is a very important and lucrative business, and as long as
you keep your cards on the table, I have no problem with that. I
think youre looking out for the legitimate interests of the corpora-
tion.
In cases like this where companies deal with countries such as
the Chinese, I have no problem with them looking out for their le-
gitimate interests. However, American corporations should not
serve as mini-state departments. While I have no problem with
them looking out for their legitimate interests and trying to make
sales and put forth the points that support the sale, when youve
got billions of dollars at stake, it makes it even more important
that we have a system and that we have people inside our govern-
ment that can take an objective look at this thing, take what you
say into consideration, weigh that, and make an objective deter-
mination.
Weve heard some evidence that with regard to the transfer of re-
sponsibility, with regard to the downsizing of the significance of the
agencies within the government that look out for the military sig-
nificance of these things, look out for the proliferation aspects, that
they have been downgraded and commerce and economic situations
have been upgraded.
Thats not a balance I understand you gentlemen to make, as I
say. But its very, very important for our government to make it.
And its also important, I think, to keep in mind that were dealing
with countries that are proliferators of weapons of mass destruc-
tion. Again, as long as youre abiding by the rules, thats not solely
your determination to make.
But as I look at the documentation, its clear, Mr. Armstrong,
that you had quite a few discussions with the Chinese. Thats fine,
that you were trying to seek agreements, that you were trying to
maybe work out disputes between our government and their gov-
ernment on occasion. It was your opinion November 16, 1993 that
the Chinese were committed not to proliferate missile technology.
But as late as last year, our own CIA says the Chinese are the
greatest proliferators of weapons of mass destruction in the world.
So your perception, while not correct, certainly did not stand alone.
I think there were many in our government who made the same
kind of mistake.
But as I say, its within a larger context and my concern is when
youve got an important commercial venture, and youre dealing
with an important commercial customer such as the Chinese or the
Russians, how do you maintain that when more and more we
know, from the Rumsfeld Report, from our CIA report, that they
are continuing to transfer missile parts, missile technology, biologi-
cal and chemical capabilities, to nations that we deem
proliferators?
 12

So again, thats not your ultimate responsibility, but its some-

thing that I think corporate America needs to be mindful of, its
something that those who administer these matters have to bal-
ance, and its something that the Congress of the United States
certainly should take very seriously from an oversight responsi-
bility. So Ill look forward to exploring these issues with you.
Thank you.
Senator COCHRAN. Thank you, Senator Thompson.
Senator Durbin, you are recognized for any opening statement
youd like to make.
OPENING STATEMENT OF SENATOR DURBIN
Senator DURBIN. Ill be very brief, Mr. Chairman. I apologize for
being late. I thank Mr. Armstrong and Mr. Dorfman for joining us
today.
From what I have learned, the decision during the Reagan ad-
ministration for the United States to forswear its commercial
launch capability really put American business at facing a chal-
lenge and maybe somewhat of a disadvantage, in shopping around
the world for adequate launch capacity. I think we all have come
to appreciate the importance of satellite technology in our daily
lives, and the quality of life in America.
What the Subcommittee is trying to do is make certain there is
a national security balance, that in no way do we compromise na-
tional security in the name of expanding our economy or expanding
this new technology.
Im glad that were having these hearings. Ive joined the chair-
man in previous amendments to try to hold back the proliferation
of technology that might assist those who would use it the wrong
way. I believe the questions that well now promulgate and the tes-
timony which will be elicited will help us reach that conclusion.
Thank you.
Senator COCHRAN. Thank you, Senator.
Senator Domenici.
Senator DOMENICI. Mr. Chairman, I have no opening statement.
I just congratulate you for holding these hearings, and I appreciate
that Mr. Armstrong and Mr. Dorfman are here. I think you can
help us, if we can discuss facts and if you will discuss thoroughly
with us your understanding in these areas. I think it will be very
helpful for us to try to determine some policy changes if they are
necessary, or perhaps look back on some things that were done in
a mistaken way in the administration of our current laws.
Thank you very much.
Senator COCHRAN. Thank you, Senator.
Mr. Dorfman, you may now proceed with your statement.
STATEMENT OF STEVEN D. DORFMAN,1 VICE CHAIRMAN,
HUGHES ELECTRONICS
Mr. DORFMAN. Thank you, Mr. Chairman, Members of the Sub-
committee, Senator Levin, Senator Durbin, Senator Cleland, Sen-
ator Thompson, and Senator Domenici. I appreciate hearing the in-
troductory comments that youve made. And Ill try to pick up at
1 The prepared statement of Mr. Dorfman appears in the Appendix on page 54.
 13

least some of the questions you raised in my prepared testimony

and then I will be glad to answer more detailed questions as we
go along.
As vice chairman of Hughes Electronics, I represent 15,000 em-
ployees who are manufacturing satellite and telecommunications
equipment internationally and for the U.S. Government and pro-
viding telecommunications services around the world. Hughes her-
itage in the satellite communication business touches back to the
launch of the first communications satellite 35 years ago in 1963,
and today close to half the communications satellites, the commer-
cial communications satellites in orbit, are built by Hughes Elec-
tronics.
Our heritage as a defense contractor goes back even further, to
our original roots in the 1940s. Hughes was built on a strong com-
mitment to preserving the national security of the United States.
And that commitment continues as a significant component to our
corporate culture.
It is largely for this reason that both Hughes management and
employees have been deeply distressed by the allegations that
Hughes had engaged in activities with respect to our satellite
launches in China that have strengthened the Chinese military ca-
pability and weakened the national security of the United States.
I welcome this opportunity to set the record straight. We at
Hughes have undertaken a thorough examination of our actions
and conduct and we have found no, underscore no, evidence that
Hughes employees have transferred any missile technology to the
Chinese. I realize that there are several Congressional committees
looking into the relevant facts. I am confident when all the facts
are out in the open, Hughes will be exonerated of any wrongdoing.
The second point Id like to make today is that in the interest
of national security, its good to have a strong, competitive domestic
satellite manufacturing industry. I strongly urge the members to
take particular care when legislating in this area. It is all too easy
to sacrifice for the sake of perceived short-term security benefits
the long-term ability of our country to be preeminent in the critical
technology of satellite communications.
I believe Senator Thompson properly raised the question about
profits being more important than national security. And of course,
we at Hughes need to turn in profits for our shareholders. They ex-
pect it as part of the capitalistic system that weve worked so hard
and so long to defend against the communist system during the
cold war. No apologies.
But I do want to make it clear, Senator Thompson, that at
Hughes, we would never compromise the U.S. national security,
would never tolerate an employee compromising the U.S. national
security.
Senator THOMPSON. Ive never suggested that you would.
Mr. DORFMAN. And thats kind of the persona of Hughes Elec-
tronics.
For example, as Mr. Armstrong sketched it out, satellites are de-
livered to China intact, with any potential sensitive technology al-
ready embedded in the satellite, not available. For the short period
they are in China, the satellites are guarded 7 days a week, 24
hours a day, by a team of security specialists. In fact, approxi-
 14

mately a quarter of the Hughes people that are at the launch site
are security personnel.
Any employee who fails to comply with the Hughes plan is sub-
ject to disciplinary action. And I would add that Hughes has al-
ways followed the same security procedures, whether or not DOD
monitors were present at the time.
We believe the decision made in 1996 to transfer leadership of
the interagency process to Commerce was a correct one. That being
said, we believe there are improvements that can be made. One se-
rious area where security can and should be improved and tight-
ened is that in the context of launch failure reviews. I think in
truth when the regulatory process was set up, launch failure re-
views were just not anticipated.
As this Subcommittee is aware, the most serious allegations re-
lating to technology transfers to the Chinese have occurred in the
context of Loral, Lorals review of a Chinese launch failure, or I
should say Lorals leadership of a review of the Chinese launch fail-
ure. This is an area that is presently not explicitly regulated, and
this deficiency in the regulatory framework must be filled.
And Hughes suggests that this Subcommittee consider legislation
or urge administrative changes that would firmly place the juris-
diction for launch failure reviews in the Department of State with
strong participatory role from the Department of Defense. I think
that would improve the current system and give everybody more
confidence that there is no inadvertent exchange of technology.
A second change that Hughes would strongly support would be
the presence of DOD monitors at all China launches. This was also
mentioned in the preliminary statements. It is true that there were
three Hughes launches in which there were no DOD monitors
there. And incidentally, the DOD was welcome to attend, and the
process permitted them to attend. They elected not to attend for
their own purposes, I dont know why they didnt come, but they
werent there, and I think we should fix that.
And the presence of DOD monitors would be one more layer of
protection that Hughes believes is well advised, and in case, in the
event that the failure of DOD to show up was for budgetary rea-
sons, I want to say here and now that Hughes will pay for the costs
of DOD surveillance during the launches as an extra layer of pro-
tection against inadvertent transfer of information.
And I might add, having looked at the records, I see no sign that
any technology was transferred, even though the DOD monitors
werent there. Because we followed the same exact procedures and
processes that were followed when the DOD monitors were there.
Now, as this Subcommittee is well aware, weve discussed
Hughes support of the transfer of licensing jurisdiction to the De-
partment of Commerce. This was not based on preference for one
government department over another. Rather, it was concern based
on a series of issues that deserve consideration as you consider
changing jurisdiction.
The most important one is in the past when satellites were li-
censed by the Department of State, this was because they were on
the munitions list. Hughes supported removing commercial
satellites from the munitions list for the simple reason that com-
mercial satellites are not weapons. Commercial communications
 15

satellites are not munitions. They have no inherent military char-

acteristic.
And that is, if they were military satellites, they should be on
that list. But they are not. They are commercial. Their generic elec-
tronic communication functions make them overwhelmingly civilian
in nature, and treating them that way is not special treatment, it
is normal and realistic treatment, just like it would be for tele-
phone switches or cellular telephone equipment.
As the Members of this Subcommittee know well, the effort to ra-
tionalize licensing policy took many, many years, and was thor-
oughly debated. There were plenty of glitches along the way, but
we presently have a process in which all interested departments
and agencies have a participatory role. This is an important char-
acteristic of the present structure that Congress should endeavor to
preserve. To simply reverse policy now without due consideration
to preserving those aspects of the current regulatory framework
that are positive and make the system workable and balanced
would reintroduce some of the same problems that we worked so
hard to fix in the middle 1990s.
If we raise unnecessary barriers to satellite exports, we will jeop-
ardize the continued U.S. preeminence in this critical technology.
And I believe putting satellites back on the munitions list will raise
just such barriers. As we move out, European manufacturers will
move in. One less American-made satellite positioned over the
globe means one more non-American made one.
I believe this will damage national security, not enhance it. I also
believe its in our national security interests to have modern com-
munication technology sending information into countries, such as
China, or the former Soviet Union, that were previously closed. I
believe it enhances our national security when Chinese citizens can
receive CNBC, CNN, BBC, and other western programming. And
thats just whats happening as we speak, through Hughes-built
satellites, some of them launched on the Long March2E launch
vehicle.
Today, it is even possible that these hearings or part of them will
be seen in China, so that Chinese people can view the American
political process.
There are two additional specific items that the Subcommittee
asked me to address, and I will briefly. There is more in the record.
And that is the 1995 APSTAR 2 launch failure investigation and
the second is the pending contract between Hughes and a company
called APMT.
Insofar as the APSTAR 2 launch failure investigation, I have a
fuller account in my testimony. I think if you read it, youll find
that we took a very thorough investigation and coordinated it very
closely with the U.S. Government. The APSTAR 2 launch involved
a Chinese launch vehicle that exploded while carrying one of our
satellites.
We notified the State Department within 24 hours. We began col-
lecting debris using a plan that had been worked out with the
State Department and the Defense Department in an earlier
launch failure. We informed the Commerce Department when we
sent a review team to China and reaffirmed that we would conduct
our review by the terms of our export license.
 16

During the review, we met with Commerce officials to present

materials we planned to share with the Chinese. After the review,
we met again with Commerce officials to discuss findings we
planned to share with our international customers, the insurance
community, and the Chinese. In each case, Commerce gave us the
approval to go ahead.
And of course, the simple fact is, in this operation, as always, we
were working as partners with the U.S. Government, sharing re-
sponsibility for the national security and relying on the govern-
ments judgment and guidance. As Ive said before, with that expe-
rience behind us, I would propose that we do even more for launch
failure reviews, and get greater participation from DOD and State.
The Subcommittee has also asked that I discuss the Hughes sat-
ellite contract with the Asia Pacific Mobile Telecommunications
Satellite Company, which is APMT. APMT is a partnership of af-
filiates of the Chinese government and private companies in Singa-
pore and soon Japan and Thailand. If APMT follows the same
course as other similar systems, it will eventually be listed on ei-
ther the New York Stock Exchange or NASDAQ and publicly trad-
ed in stock markets in the United States and elsewhere.
Theres been a lot of erroneous reports about the APMT system
and its capability. So Id like to speak for just a moment about it.
The APMT system, when deployed, will be providing satellite mo-
bile telephone service to over 20 countries in the Asia Pacific re-
gion. Its basically a cellular phone system in the sky. It turns out
its identical to a satellite were building for a Middle East consor-
tium called Thuraya, for which we have been fully licensed by the
licensing process.
The system is designed so that anyone with a satellite phone can
make a call to anywhere on Earth. This is true for the Chinese
military if they choose to use it, or for that matter, any military
that has a phone and the amount of money necessary to make the
telephone call. And of course, its really aimed at commercial cus-
tomers, entrepreneurs, students, journalists, intellectuals, anybody
with a phone and enough money to make a call, just like any cel-
lular phone system.
It is also true that the APMT satellite to perform this function,
along with its clones, requires a large reflector and some on-board
processing. That makes it a little bit more sophisticated than some
of the other satellites. And thus it has some more advanced tech-
nology.
We have safeguards to keep design details from any unauthor-
ized people, any foreigners, to protect this design information. The
State Department has approved our processes for protecting the
sensitive design information for APMT and Thuraya. We do not
want to release any design detail on this sensitive information.
Hughes received critical approvals for APMT from State and
Commerce in 1996. This included the approvals that I mentioned
for safeguards of sensitive technology. Minor design changes now
require we get a renewal of this license. And I hope this Sub-
committee will encourage the Departments of State and Commerce
to act promptly so that we can meet our contractual obligations
with APMT.
 17

Once again, I thank the Subcommittee for the opportunity to be

here today and discuss these issues which are so critical to our Na-
tions competitive strength and to our national security and to our
company. And I look forward to your questions.
Thank you very much.
Senator COCHRAN. Thank you, Mr. Dorfman, for your statement,
and for your continued assistance in trying to give us answers to
questions that we advanced to you before the hearing. We thank
you for that as well.
One thing that occurs to me at the outset is that when the
changes were made in the export control policies and the Com-
merce Department was given the lead role on issuing licenses, one
thing we learned from our government witnesses at an earlier
hearing was that it was the Commerce Department that really
made the decision as to whether a license was required or not,
which was an interesting thing for us to find out. And that there
really was not an interagency review process in place to review
that decision.
It was an interesting anomaly, it seemed to me, in the process.
And Hughes must have been troubled by that, too. Because back
in October 1997, a letter was written. And Im going to ask the
staff to hand Mr. Armstrong and Mr. Dorfman a copy of this letter.
Its dated October 8, 1997.1 And it expresses concerns and ques-
tions about whether or not certain satellite components and sat-
ellites required a license to be issued.
And this calls to the attention of the Commerce Department that
Hughes had asked questions about whether a license was required,
and they hadnt gotten an answer. And they wrote again and
hadnt gotten an answer.
Well, this letter dated October 8, 1997, according to the Com-
merce Department, still hasnt been answered. And we raised this
question on July 8 with Under Secretary William Reinsch.
So were coming up on 10 months since the letter was written.
And Hughes, as far as we knowmaybe you can tell us different
still hasnt heard from Commerce. And it seems to me that if the
rules about issuing licenses for these satellite exports are so ambig-
uous that Hughes, which is the leading company in this area,
doesnt understand whats covered and whats not covered, and the
Commerce Department cant figure out how to answer the letter,
weve got a problem.
I wonder what your reaction is, Mr. Armstrong, to this situation.
And whether this is an indication of a part of the process that
needs to be fixed right away.
Mr. ARMSTRONG. Mr. Chairman, I never saw this before the staff-
er just handed it to me. So I wasnt aware of a letter sent by
Hughes that had not been answered by the Commerce Department.
I dont think specifically I have any insight to bring to the situation
per se. I guess I would go back that if the assertion is that theres
an October 8 letter that the process doesnt serve in terms of get-
ting an answer, that would serve the licensing process, that ought
to be part of tightening the licensing process.
1 Letter dated October 8, 1997 to the U.S. Department of Commerce from M.E. Mersch, Man-
ager, Export Compliance, Hughes Space and Communications Company appears in the Appen-
dix on page 70.
 18

Senator COCHRAN. Mr. Dorfman, whats your reaction?

Mr. DORFMAN. Well, Im just reading this letter as we talk. But
what I think we see here is an effort by Hughes to get answers and
details on licensing that Hughes is, I believe, reading this thing, is
doing its utmost to get the clarification it needs to get on with its
job.
Senator COCHRAN. Well, this is an example, it seems to me, of
the fact that even putting the responsibility at Commerce, where
industry says we get more response, we get specific time tables and
all the rest, that weve still got a problem with this administration
in export licensing. If this industry, if your company cant get an
answer to straightforward inquiries about whats covered and what
isnt covered by a license requirement, I dont know how anybody
else is going to understand the regulations.
Has this not come to your attention, Mr. Dorfman?
Mr. DORFMAN. Im aware of continued discussions as the agencies
in the new environment trying to comply with the licensing process
is working out, how to operate. So I am aware of that in general.
I think its constructive in that people are moving forward with
good intentions.
The process of licensing technology, as I think was said earlier,
is not a simple one. Its not a black-white one. Its got some grays
to it. I think what were seeing here is Commerces striving to deal
as Hughes is with the new arena of licensing.
Senator COCHRAN. I know there might be some reluctance to
criticize the Commerce Department, if youre having to deal with
this regulatory regime every day. But could you tell us of any other
difficulties that your company has had in trying to comply with
Commerce Department regulations in this area?
Mr. DORFMAN. I have some advisors here who do know about this
thing, and they have advised me there is an explanation for this
letter which Im not aware of, but well certainly be glad to supply
this to the Subcommittee.
Senator COCHRAN. That would be very helpful.
What about any other problems that have come to your attention
as a result of Commerce Department having the responsibility for
administering this regulatory regime?
Mr. DORFMAN. Well, Ive already referenced one of them. I think,
in hindsight, even though we did everything properly, it would
have been better and made everybody feel more comfortable if
there was more DOD activity in launch failure reviews. I mean,
thats an area thats come to my attention, I think Ive explained,
described my views on the subject.
Other than that, I know of no specific complaints that Hughes
has to make about the performance of the Commerce Department.
Senator COCHRAN. Weve talked about this problem of launch
failure review. And I noticed in your comments, Mr. Dorfman, you
mentioned that a launch failure review is not specifically regulated.
At our last hearing, Acting Under Secretary Holum from the De-
partment of State, when discussing this business of launch failure
review, said that in his judgment, the work done by U.S. companies
in connection with reviewing the launch failure, would be a defense
service. And as a defense service, would require State Department
approval before providing that service.
 19

It raises a question to me, again, whether or not there is a break-

down in communication or understanding between the companies
that are being regulated and the agencies that have responsibility
for administering those regulations. Here we have on the one hand
the State Department saying, thats a defense service, and there-
fore you have to come to the State Department to get approval be-
fore you engage in a launch failure review where you are providing
information and you interact with, for example, the Chinese in the
case of this APSTAR 2 launch failure.
What is your reaction to that difference of opinion that we obvi-
ously have between you and Secretary Holum?
Mr. DORFMAN. I do not see that as a difference of opinion. I
wasnt aware of that testimony, but if that was the interpretation,
that would be entirely consistent with my suggestion that the State
Department take an active role in administering launch failure re-
views, which is one area where I think a tightening up of the proc-
ess should be done.
So I dont know the details of that statement, but it sounds like
its consistent with what I am proposing here, in an administrative
way.
Senator COCHRAN. Weve heard that some companies, where
there is some question about whether the State Department or De-
fense Department ought to be involved, have voluntarily invited
them to participate or send monitors. I think this has occurred in
the case of launching U.S. satellites in China, where it was not cer-
tain whether DOD monitors were required. They were invited.
In the case of the APSTAR launch failure investigation, you
could have invited the Department of Defense or the Department
of State to participate or to review what you were doing. But you
did not, is that right?
Mr. DORFMAN. Well, as I said earlier, the Department of State
was aware that there was such a failure and a failure review un-
derway. We did not invite them, to my knowledge, that may have
happened and Im just not aware of it. But Im here today publicly
saying, as vice chairman, I want them there.
Senator COCHRAN. Mr. Armstrong, you were the CEO at the
time. What is your recollection about that event? Do you recall
there being any discussion at Hughes about whether the State De-
partment or Defense Department ought to be involved in the
launch failure review?
Mr. ARMSTRONG. No, sir, I do not. I would receive reports as to
the progress of the review from time to time. They were verbal re-
ports, as you might expect, as the situation related to the company.
But the details of what was going on and how it was being con-
ducted was not something that I was personally involved in.
Senator COCHRAN. There was a launch failure back in 1992, I
think its referred to as the Optus B2 launch investigation. Are you
familiar with that, Mr. Dorfman?
Mr. DORFMAN. Yes, I am, sir.
Senator COCHRAN. That first launch failure in 1992 resulted in
a review, and Hughes participated in that, did it not?
Mr. DORFMAN. Yes, it did.
Senator COCHRAN. And in that instance, Im told that monitors
were present. And that reports, as they were developed, were given
 20

to the Department of Defense or the Department of State or both.

And they were reviewed before they were released to the Chinese.
Why wasnt that same procedure followed in the APSTAR 2
launch failure review?
Mr. DORFMAN. As I said, that was under the jurisdiction of the
Department of Commerce. We had all of our coordination with the
Department of Commerce, who was in charge of that process.
Senator COCHRAN. OK, now, that leads me to the inescapable
conclusion, and Im going to ask Mr. Armstrong if you agree, that
having the Department of Commerce with the primary responsi-
bility for licensing has spilled over to includein the view of the
regulated companies as well as the Department, the responsibility
to supervise, a launch failure review, if any supervision is given.
Is that your conclusion?
Mr. ARMSTRONG. Well, I think theres a lot of homework being
done by some of the committees that are looking into this. From
what I know, on launch failure reviews, it does not appear that the
process is as it should be. And that more designed involvement,
rather than invited involvement, would really be the right steps to
tighten that. So I guess I would have to agree with that, on the
review process.
Senator COCHRAN. Looking back over it all, do you agree that it
would have been the better practice to communicate that view to
the Department of Defense or to the State Department or to the
President in your capacity as president of the Export Council? Or
as a citizen of the United States where you see the possibility of
the conveyance of information or technology to China in an unau-
thorized way?
Mr. DORFMAN. Mr. Chairman, I would like to make it clear that
I have gone back over what was done, not in detail, but enough de-
tail to convince me there was no improper technology exchange, in
the sense of no material technology was transmitted to the Chinese
that would help them build missiles. I want to start from that
point, because thats an important point to keep up with.
But in hindsight, I think the DOD should have been there. I
cant tell you what the reasons were that they werent asked. They
certainly were invited to be there by the whole licensing process.
They didnt show up.
Perhaps we should have then taken a more active role in getting
them there, only for the reason to make absolutely sure and make
everybody feel good that there was no improper technology trans-
fer. But I dont believe there was any improper technology transfer,
anyway.
Senator COCHRAN. Senator Levin.
Senator LEVIN. Thank you.
Just on that point, according to your testimony, Mr. Dorfman,
you said that immediately after that flight failure that the Depart-
ment of State was notified, is that correct?
Mr. DORFMAN. Yes.
Senator LEVIN. So they knew about that. And then your next
sentence is that your recovery program was conducted according to
a debris recovery contingency plan worked out with the State and
Defense Departments following a previous launch failure. So appar-
ently at a previous launch failure, State and Defense had worked
 21

out some kind of a contingency play to recover debris with you, is

that correct?
Mr. DORFMAN. Thats correct, sir.
Senator LEVIN. So at some point, then, State and Defense were
involved in approving a contingency plan following a launch fail-
ure, is that safe to say? But not in this particular launch failure?
Mr. DORFMAN. There was a very similar launch failure in 1992.
We worked out a plan, it was approved by DOD and State. That
was the same plan that we went forward with in a similar failure
in 1995.
Senator LEVIN. Now, youre suggesting that formally, the launch
recovery, excuse me, the launch failure review, be basically under
State Department jurisdiction, or in effect be on the munitions list
for State Department approval. I think that makes a lot of sense,
by the way, just the way State and Defense were involved in pro-
ducing that plan following the previous review. Theres no reason
why they shouldnt be in charge, it seems to me, following any
launch failure of any approval of recovery plans. So I think that
makes a lot of sense.
Why do you stop there, though? Why do you both believe, which
you obviously do, that the licensing to begin with should remain
with Commerce, rather than being transferred back to the muni-
tions list? That is the issue which was voted on by the House of
Representatives overwhelmingly to transfer back, despite the fact
that the House of Representatives put tremendous pressure on the
President to transfer those same satellites to the commerce control
list just a few years before.
Now, following these events, weve got the House of Representa-
tives voting overwhelmingly to transfer satellites back. But you
think that would be a mistake, and the Senate is going to be facing
that issue either on the Floor or in our defense authorization bill,
which were currently negotiating, or both. So Id like to hear a lit-
tle further explanation as to what difference does it make, and
more important, is national security protected as much with sat-
ellites on the commerce control list as it would be on the State De-
partment munitions list? Because that may be our interest, its
surely mine.
Mr. ARMSTRONG. Exactly the question I had coming to Wash-
ington. Because I had gone through, of course, my own briefings,
both on what was the embedded technology, how was it protected
and guarded, and what risks would we have. Because as weve al-
ready tried to both explain, were very sensitive to national secu-
rity.
The first people that I called on, I think you could tell from the
testimony, were Dr. Perry, Dr. Kaminsky, the DOD staff, CIA, the
National Security Advisor, ERO, and NSA. And Senator Levin, I
asked the same question, is there some risk, is there some process,
or is there some procedure. Because this is not about us trying to
in any way jeopardize or put at risk national security. This is about
a commercial product that goes up there and competes with other
commercial products.
And I asked them for their questions, their concerns, their input.
And then if they would support it, their support. And anything in
the process that they wished to change, that this company, in this
case Im talking when I was with Hughes, was prepared to do.
 22

Because we were not trying to transfer the oversight of national

security. We were trying to get a commercial product that was com-
peting with other commercial products to go through a review proc-
ess that would not be a munitions process that would be subject
to sanctions. Because sanctions cost us very dearly, not only in
China in terms of launch or China in terms of a customer, but
throughout the world. If the commercial products of this country,
in this case satellites, were subject to those sanctions, the degree
of uncertainty in dealing with us and all the companies that build
satellites, was there.
So it was all about moving it as a commercial product off a muni-
tions list, not in any way, shape or form attempting to in any way
diminish national security. Thats why I started there, and thats
what they told me.
Senator LEVIN. Why is national security protected to the same
degree with satellites on the Department of Commerce control list
as they would be on the munitions list?
Mr. ARMSTRONG. When I called on the respective security agen-
cies, I did not assume that was Hughes job to put forward, but
rather to offer that Hughes, whatever the national security inter-
ests of those particular agencies would be, that we would abso-
lutely comply with them and to make sure that they understood
that we would not resist or try to change.
Senator LEVIN. I just have two questions more for this round.
One argument that is heard is that when American companies are
required by their clients to use Chinese launch vehicles, that Amer-
ican companies then have an irresistible incentive to help the Chi-
nese engage in successful launches so that their satellites arent
blown up.
Whats your response, then, to the argument that Hughes, like
other companies, has this irresistible incentive to help launch
Hughes satellites successfully, and that necessarily contributes to
the knowledge of launching rockets?
Mr. DORFMAN. Well, of course we want the rockets to work and
the launch vehicle to perform its job. But weve never, and would
never, go beyond working with the interface that we have. We
wouldnt go through, in fact we have really at Hughes no knowl-
edge of launch vehicle technology to improve their launch vehicles.
We understand that if we improve their launch vehicles, it could
improve missile technology.
But we have rules, regulations, procedures, processes that pro-
hibit specifically anything that would transfer missile or launch ve-
hicle technology to the Chinese. We dont do it.
I would also like to add to the point that Mike made, which was
a passionate advocacy for why it should be in the Commerce De-
partment. The Commerce Department is really leading an inter-
agency operation here, so that all agencies do participate in the
process. And I think the process can be improved, in the ways that
I suggested.
But I dont think the fix is to move it back to State. I think the
fix is to improve the process, the interagency process that Com-
merce has going now.
Senator LEVIN. An article on June 25 this year quoted an
unnamed Hughes official as follows: Hughes followed all the cor-
 23

rect procedure. We just didnt want somebody from DOD looking

over our shoulder. Thats the quote, New York Times, June 25.
Could you comment on that quote? I assume it wasnt you.
Maybe I shouldnt assume it wasnt you. [Laughter.]
Would you comment on that quote, please?
Mr. DORFMAN. First of all, its not my policy or Hughes policy,
and Id like to find out who said it, if anybody from Hughes said
it, so maybe if the New York Times could help me by divulging the
name, Id be happy to talk to that person. It is not Hughes policy.
Senator LEVIN. I think youd better move on to a different part
of the answer, though.
But are you saying then that is not accurate, that you had no
problem with DOD looking over your shoulder? Since 1996, DOD
is monitoring every launch. Its only true since 1996, since that ex-
ecutive order. Now every launch is being monitored. Whereas when
the satellites were divided between the two lists, that was not true.
Now, my question to you is, that statement, do you have any ob-
jection whatsoever to the Department of Defense monitoring every
one of these launches or doing anything else that it determines to
be in this national security interest, and if so, please let us know
now.
Mr. DORFMAN. Not only do I have no objections, I encourage it.
And I dont rule out the possibility that some of the Hughes people
out there in the field, trying to get their job done, would have prob-
lems. Nobody likes people looking over their shoulder, whether its
Hughes security people or DOD security people. So thats a natural
fact of life, Senator Levin.
But thats where the leadership and the management of the com-
pany has to step in. And as a policy, I would support DOD moni-
toring launches, even if there are some people at the working level
that find it objectionable for the reasons that Ive described.
Mr. ARMSTRONG. Senator Levin, if I may just reiterate, because
I dont want it to be remembered that that is something we
thought up today, when I called all those top security officials that
I went through, I offered, we would cooperate with whatever secu-
rity that they would wish to apply to the process. And every per-
son, I think if you would like to call them back, would attest to
that, in that Hughes was never resisting anything to be imposed
in terms of national security.
Senator COCHRAN. Thank you, Senator Levin.
Senator Thompson.
Senator THOMPSON. Thank you.
Could we have our exhibits, four and five, eight and nine, given
to Mr. Armstrong? I believe these are all Mr. Armstrongs docu-
ments. Mr. Armstrong, these are all letters that you wrote back in
1993.1 And it has to do with our sanctions policy. And you were
encouraging the administration, I think its fair to say, to recon-
sider sanctions that had been imposed on China or Chinese enti-
ties. Let me give you a few minutes.

1 Letters dated September 7, October 21 and 29, and November 16, 1993 appear in the Appen-

dix on page 6267.

 24

Letters dated September 7, October 21 and 29, and November 16,

1993have you checked over them? If you need any more time, Im
not going to dwell on any particular language here, too long.
I just think its important to note that you were concerned and
advised the administration of your concern about their sanction
policies toward China. This is something that were still dealing
with today as far as our sanction policies with regard to various
countries, especially those who have proliferation problems.
And this goes back to 1993, and youre writing the President, sec-
ond paragraph, on September 7: However, I have a problem at
Hughes, and would appreciate your help. The State Department
has recently imposed category 2 MTCR sanctions against China,
significantly impacting Hughes, and potentially could cost us thou-
sands of California jobs. While we support the objective of control-
ling the spread of nuclear delivery systems, the Hughes commu-
nication satellites in no way contribute to nuclear proliferation. In
fact, our satellites will be transmitting CNN, HBO, ESPN, BBC,
and other western programs directly to the Chinese people.
So here I take it youre pointing out that the things the Chinese
are being sanctioned for have nothing to do with what youre trying
to sell them, is that the point?
Mr. ARMSTRONG. Yes, thats the point. Its not a munition, its a
commercial product doing commercial stuff.
Senator THOMPSON. Yes. You see, that raises a policy question
for us that were going to have to deal with as to whether or not,
lets just take a hypothetical situation, you have a country that
were carrying on commercial activity with, but we know that
theyre carrying out major proliferation activities.
But our commercial activity has nothing to do with those items.
It could be anything from grain to commercial satellites. And we
have a determination to make as to whether or not there needs to
be a direct relationship.
My own opinion is, if you wait for a direct relationship, you never
will have sanctions. But this points out, I think, the policy question
that we have, and the perspective of industry and the communica-
tions that industry has with this administration and perhaps any
other administration.
October 29, on down the line here, I am respectfully requesting
your involvement to resolve the China sanctions at the upcoming
Seattle APEC meeting November 1819.
In the October 21 letter, you tell Secretary Christopher Warren,
second paragraph, Counselor Song, as well as Vice Minister Wong
of the Ministry of Aerospace both stated, China is prepared to re-
commit to the MTCR, this is with regard to the missile policy, if
the United States will drop sanctions. As best I can understand
what were trying to accomplish, this would enable the President
to make a positive foreign policy announcement, put a difficult in-
dustrial technology and jobs issue behind us, and communicate to
the world that the United States and China can agree on some-
thing thats important.
So you were getting an opportunity for an input with the Sec-
retary of State with some pretty broad national policy questions,
werent you there, Mr. Armstrong?
 25

Mr. ARMSTRONG. Yes, sir, Senator, I was. I would have to share

that the State Department had asked me to have conversations.
And in all cases, before I left I was briefed. When I arrived in the
countries, I went to the embassy and met with the ambassadors.
Before I left the country, I met with the ambassador. When I came
back I was briefed or debriefed by appropriate officials.
Senator THOMPSON. Right. In other words, you served as an
intermediary with regard to some of these things? Between the two
governments?
Mr. ARMSTRONG. On some very limited, one or two points, I was
asked to.
Senator THOMPSON. And in your November 16 letter, youre writ-
ing to Sandy Berger and Leon Fuerth, Assistant to the Vice Presi-
dent, National Security Affairs, second paragraph: I briefly de-
scribed that in meetings with the Chinese and the USG over the
past several months, it was obvious that both sides were in agree-
ment, i.e., one, the Chinese are committed not to proliferate missile
technology, and two, with the Chinese commitment, the USG is
prepared to drop sanctions. The problem is, who and when, who
takes the first step?
I think we know now that of course, the Chinese apparently were
not committed to stopping their proliferation policy. But I think
theres a broader question here. Again, I would expect you or any-
one else in industry to make your case as you saw it. But it really
does point out the need for a strong counter-balance within our
government.
I think many of us, certainly I feel that we have not judiciously
used our sanction policy when we should have. You take the Chi-
nese for example, members had concerns about the only time this
administration has ever imposed sanctions on China. And they
were category 2 sanctions, which were milder than they could have
been.
And they lifted those sanctions. And the Chinese violated their
agreement again.
The background of that, of course, had to do with the M11 mis-
siles. We caught them sending M11 missiles to Pakistan. How-
ever, our administrations conclusion was that we could only prove
M11 missile canisters, that we didnt know whether or not there
were missiles in those canisters. Therefore, we would only impose
the level 2 sanctions.
Later on, we found out they were sending ring magnets to Paki-
stan, which could only be used for uranium enrichment that would
go into a bomb. Our administration concluded then that we couldnt
prove that people at high levels in the Chinese government knew
about it. No sanctions.
Then they shipped anti-ship cruise missiles to the Gulf, to Iran,
and a pretty clear violation of the Gore-McCain Act. The adminis-
tration there concluded that they were not destabilizing, as re-
quired by the statute.
So the policy issue really is set out in stark terms. On instance
after instance after instance of proliferation up to the present time,
sanctions have not been imposed. Yet where they did, they run
right headlong into a very, very real industry concern. My concern
 26

is that industry is getting its input, but where is the input coming
from the other side?
Thats what we have to contend with. If you have any ideas on
that, I would welcome them. Its not your job. This transfer to the
Commerce Department, it may be interagency, but weve heard
testimony from witnesses from DTSA and others who have the
responsibility of raising warning signals when sensitive military re-
lated technologies are transferred. They say that Commerce con-
trols the process, its on a real fast turnaround, that there is a prej-
udice against appeal. Its made very difficult to appeal up during
the process and so forth.
So I think thats something were going to have to address. I
know thats more a statement than a question. But any comments
or observations either of you have on that?
Mr. DORFMAN. I might respond a little bit, Senator, because I
was very much involved during that time period. And I have a se-
ries of thoughts on that. The first one is, why satellites? Satellites,
as I said before, its just like a telephone switch. Its not an aero-
space device, its a telephone switch. Why not IMUs that go on Boe-
ing 747 airplanes, which probably have more technology in it than
do satellites? Thats the first thought I have, why satellites? They
are really commercial items.
Second is
Senator THOMPSON. Well, can I interrupt you there?
Mr. DORFMAN. Sure.
Senator THOMPSON. At least up until the time of the transfer,
there were apparently significant players within the government,
within the State Department, who thought that there was sensitive
militarily relevant technology within these commercial satellites.
They even had a criteria that if you had any of these nine features
in this commercial satellite, that it had military sensitivity, and
therefore would remain on the munitions list.
At least I think we can say that there has been, apparently for
some time over administrations, a disagreement as to whether or
not that is really militarily significant. Prior administrations have
thought there was, this administration continued the same policy
for a while, then this administration made the change.
You can argue a case that the change should have been made.
But I dont think that you can really raise the question as to why
theres any sensitivity there simply because theyre commercial sat-
ellites. Because people of more than one administration have con-
cluded in times past that there was military sensitivity there.
Wouldnt you agree with that?
Mr. DORFMAN. I would like to get to that point, but I think
theres also another, a second point, which I think the people who
are meeting on discussing the very important issue that you raised
about sanctions and their effectiveness. I do want to make the
point that what happened here, and I think it would happen in any
other instance in which commercial satellites were used as sanc-
tions, is that the party that was to be punished had a very simple
solution, which is just to buy satellites from the Europeans.
The European satellites I believe are not as good as our sat-
ellites, but theyre pretty close. Were in a very competitive environ-
ment. And the simple solution, which is what was done, as a mat-
 27

ter of fact, back a few years ago, was just to go buy from the Euro-
peans who have no such sanctions and were willing to sell a sat-
ellite.
So satellite sanctions or any sanctions, I think, need to be multi-
lateral. But of course, thats another subject. I want to point out,
theres two levels. First, satellites didnt belong there on the sanc-
tions, and second, they were ineffective in any leverage at all, be-
cause its easy to go and buy European satellites.
Getting back to your point about the nine items, it is correct,
there were nine items that were identified as potentially military
technology. And none of the satellites that were considered for
sanctions had any of those nine items on the satellite. So we went
ahead and proceeded to launch.
Today we have a process where if any of those sensitive items
are on a satellite, that we go through a process with the State De-
partment, this is part of the interagency agreement where the
State Department then does have a licensing process for those com-
ponents.
And I need to make one more point here. Because I want to do
this all from the standpoint that we at Hughes, and I personally,
are very much opposed to proliferation of weapons of mass destruc-
tion. I think the situation in the world is still dangerous. Its not
so much the cold war any more, but its dangerous to come from
any place.
So we strongly support that policy, individually and collectively.
But going through these nine items, which include things like
encryption, include things like extra large antennas and others
which might be used for military satellites, that when the satellite
has completed its construction, theyre embedded, you cant see
them, you cant do anything about it, you cant learn anything
about it. The current process has a way of dealing with those nine
items.
Senator THOMPSON. Then why do you insist that DOD monitors
should be present for launches and involved in failure analysis?
Mr. DORFMAN. Frankly, just to eliminate any concerns of the
kind that you raised, which is that there might be conflicts with
Hughes people, I dont believe there are any such conflicts, sir. But
I dont want to have any inference, any concern, any doubt about
the efficacy of Hughes in controlling technology. Thats the only
reason.
The processes we use would be the same in either event. There
was no missile technology transferred, even though the DOD peo-
ple werent there. But I feel in order to make sure everybody is
comfortable that there is no technology transfer, that we go ahead
and voluntarily pay for DOD monitors.
Senator THOMPSON. Thank you.
Mr. ARMSTRONG. Senator Thompson, could I make a comment,
please?
Senator THOMPSON. Sure.
Mr. ARMSTRONG. I just learned more about the Chinese activities
than anybody ever told me at the time. Because I always assumed
that the Chinese had violated and deserved the sanctions. And that
was always the premise from which I dealt.
 28

Second, disagreement about the embedded technology. The De-

partment of Defense didnt disagree. The CIA didnt disagree. The
NRO didnt disagree. And when I called on Admiral McConnell, the
only thing that he offered, he said, Mike, Id really like to work
with you all on how we can get this encryption thing properly con-
trolled, and thats my greatest concern. And I dont know how it
worked out between agencies, and we had some people assigned to
it. Evidently it did work out.
But I think the whole security establishment and national de-
fense establishment understood that this embedded technology
could be protected and supported it, the disagreement was the
State Department. And within the State Department, there was di-
vision as well.
Senator COCHRAN. Thank you very much.
Senator Cleland.
Senator CLELAND. Thank you very much, Mr. Chairman.
Mr. Armstrong, nice to be with you. Mr. Dorfman, thank you
very much.
Im trying to, as somewhat of an amateur here, make sense of
this. Im an old Army signal officer, so I understand a little bit
about telecommunications, but not much. Things have changed
dramatically since I was in the military and dealing with some sat-
ellite technology.
I might just talk about launch capability just for a second. I un-
derstand that theres maybe a backlog of some 2,000 satellites now
over the next few years that American industry would like to
launch. In other words, that there is a backlog, a market, a need
out there for launch. Is that basically true?
Mr. DORFMAN. Well, I cant vouch for the total number. I can tell
you for sure that today the demand for launches exceeds the supply
for launches.
Senator CLELAND. And I understand that the U.S. capability to
launch is only about 40 percent of the need to launch or the desire
to launch. In other words, as you say, Mr. Dorfman, the demand
exceeds the ability to supply, the need for launch capability.
Did we, as a country, get off track back in the late 1980s when
President Reagan decided that this country, in effect, would abdi-
cate to other nations launch capability for commercial satellites,
and then in effect open it up to the Chinese, the French and the
Russians? Is that where we got off track and is that how we got
into this question ultimately of this piece or that piece or that sat-
ellite or that embedded technology or whatever being transferred
over to some missile launch capability, then that helped some coun-
trys nuclear proliferation? Is that how we got to here?
Mr. DORFMAN. I would like to step back a few years to the mid-
1980s, as you suggest. In 1986, January 1986, the Challenger ex-
ploded, and six people were killed, including a friend and colleague
from Hughes. Prior to that explosion, it was the policy of this gov-
ernment that all commercial communications satellites were to be
launched in the shuttle. In effect, the U.S. expendable launch vehi-
cle industry was dismantled.
Shortly after that failure, that policy was reversed, and no com-
mercial communications satellites were to be launched on the shut-
 29

tle. And this was a terrific blow to Hughes, because we had a hand-
ful of satellites that needed launching.
What that started was, Hughes started to have to go overseas.
And at that point in time, it was only the Arianne spots that were
available to us. And the U.S. industry scrambled to try to recreate
the launch capability. Even today, many years later, there is only
one U.S. expendable launch vehicle thats in the category of most
of our launches, which is the Atlas, currently run by Lockheed
Martin.
During that time period, Hughes, myself personally and Mike
Armstrong, went here to Washington to urge expenditures on de-
veloping a next generation launch vehicle. Lockheed Martin and
McDonnell Douglas felt like it would be imprudent to make a major
investment. Their perception of the world, for whatever reason, was
that there wouldnt be a tremendous demand for satellites. That
was different than our perception. We saw an increased need for
satellites, which I have to say today, even I underestimated, to be
frank with you.
So here we were talking to the major companies saying, invest
in launch vehicles, U.S. Government, and there was not a lot of
sympathetic response. So of necessity, we were forced to go over-
seas.
Now, I have to say at the same time, roughly, the cold war
ended. And now, the policy of constructive engagement with the
former Soviet Union and China took place. And that was a national
policy which I think was the background for Ronald Reagan and
subsequently George Bush to say, on balance, national security in-
terests, it would be prudent to allow launching from China and
Russia, effectively its Kazakhstan, and we and others started
launching.
But that wasnt all we did. Because I still feel personally that its
important for the United States to have a strong launch vehicle ca-
pability for government reasons as well as commercial. So we went
as Mike Armstrong alluded earlier, he was our leader at that point
in time, and strongly endorsed us going to our board for permission
to make a major commitment, which now is over, he mentioned
hundreds of millions, its been going up since he left, its over two
billion of commitment, first to McDonnell Douglas for the Delta 3.
Then to Boeing for the Boeing Sea Launch. And our way of commit-
ting was to buy 10 launches at a time to give their board the con-
fidence to make their own investment in launch vehicle capability.
Weve done a similar thing in Japan with the H2A rocket. So we
are now the worlds biggest buyer of launch vehicles around the
world, including the Long March2E. But the Long March2E is
really a small part of it. Its really more of the others that Ive men-
tioned.
Senator COCHRAN. Senator Cleland, weve had the second bell on
a vote. Im going to go over and vote, and yield the duties of the
chair to the Senator from New Mexico, Mr. Domenici, who has
some questions. If you have further questions, well entertain those.
Senator CLELAND. Well, I do, but Ill go over with you to vote.
Senator COCHRAN. Well protect your right to ask questions when
you come back.
Senator CLELAND. Thank you very much.
 30

Senator COCHRAN. Senator Domenici.

Senator DOMENICI [presiding]. Mr. Chairman, I thank you. When
I go vote, I cannot come back, Im sorry about that.
For you all, you havent seen me ask very many questions on this
subject because I have been unable to attend these hearings until
this date.
But let me say, Mr. Armstrong, I am concerned as I read the let-
ters that preceded your appointment to the chairmanship of the
Export Council relating to these issues. I dont find them in similar
language with statements about, I support you, you support me,
after you became chairman. But I assume that perhaps you didnt
have to do that then, because you were chairman and in contact
with the White House.
But I think it is important that we understand this issue as best
we can. Most of us are free enterprisers, and I am proud of what
you do. I am on your side. You can check my votes around here.
I would rather have the private sector assume responsibilities in
these fields than I would the government of the United States.
But we have a very serious issue here, because however confused
it is, somebody has to determine whether these licenses are in the
best interests of the United States. Not only because of jobs in Cali-
fornia, which you are concerned about in one of these letters, but
because the security interests of the United States may be in-
volved. And I am ready to admit that its not easy to determine
when the security interests of the United States are involved.
But I am concerned when I read a letter from somebody like you,
who then becomes chairman of the Export Council the President
puts in charge of the licensing issue, when you say: You asked me
to improve the economic environment through legislative change, I
did. This is October 29. You asked me to support your changes
in export policies, I did. This is directed to the President.
You asked me to support NAFTA more strongly, I did. And
then you say, I most respectfully request your involvement to
solve the China sanctions at the upcoming Seattle APEC meeting,
the PRC state counselor Song has told me that you are positive to
do this, and then you go on to some other statements.
Now, I think we have a responsibility to find out, in the process
that we are using, wherein we involve businessmen, and there are
a number of business executives from the satellite communications
industry that are on this council. And Im not saying they shouldnt
be there. I think they should be on it, just as other people should,
because we need their expertise.
But Im somewhat concerned about whether or not there is
undue pressure on the system to determine whether or not our na-
tional security interests are at stake, if in fact we have people
there who are very powerful and in political contact with the Presi-
dent, urging that we do certain things. While I trust business im-
plicitly, and Im not arguing that you would ever intentionally do
anything to jeopardize our national security, I do believe the power
to get your business with the Chinese and the Russians is a very
powerful force.
Then when we find that the satellite export process gets a little
bit looser when we give it to Commerce than when it was at State,
and when you are willing to admit theres at least one major thing
 31

that wasnt occurring when it got to State that youd like to see
changed, I just wonder, and I lay it before the Subcommittee and
before you, I wonder if we ought not be more concerned about who
serves on these advisory groups and what their relationship is to
the Executive Branch of Government, because of the undue influ-
ence that might occur.
And Im not accusing anyone. But as I read your letters it strikes
me that there was an awful lot of politics involved prior to your be-
coming chairman. And I would logically assume there would be as
much or more when youre chairman, unless Im grossly mistaken
about human nature, or you quit being whatever you were and got
mad at the President, which I assume you arent, even as of today.
So would you comment for one minute?
Mr. ARMSTRONG. Yes, sir, Senator, Id like to. First, before I came
to Hughes, I did not have any activities, per se, in Washington. I
cannot remember meeting the President, I think I shook George
Bushs hand once. But that was it.
And when I wrote that, in fact, the first time I ever met Presi-
dent Clinton was with that group at that economic roundtable that
I mentioned, where he came to Los Angeles to look into Southern
California, because we were really having tough times out there.
And that was the first time I had a real opportunity to express my-
self directly to him, please look into this.
When I was writing that letter, the President had asked me, as
the chairman of Hughes, not to do with the chairman of the Export
Council, as you rightly state, would I look at the policy relative to
economic development. He had asked me, and I responded posi-
tively to it. And he had asked me to look at the NAFTA situation
and the policy on NAFTA. And I positively responded to it.
All I was doing as the chairman of Hughes, not as the chairman
of the Export Council, was asking him to look at this policy. It
doesnt belong on the munitions list.
Mr. DOMENICI. Well, Mr. Armstrong, let me just say, Ive been
at it a little longer than you up here, not as long making the equip-
ment that you make in your company. But at the bare minimum,
you need some help in letter writing. That is not the way to write
a letter to the President that is going to be made public seeking
relief with reference to something that is pending in the Federal
Government, in my humble opinion.
And this is causing as much concern as many of the other things.
Because the politics of all this, while we arent talking about it
much today, is in the air. And it might be nothing. There may be
no politics to any of these changes in policy, and yet there may be
some. And the letter just plants the seed that
Mr. ARMSTRONG. Well, Im sorry it does that, because it was all
about policy. I was not involved in the politics of it.
Mr. DOMENICI. Thank you very much.
He gave me the Chair, so were in recess until he arrives.
[Recess.]
Senator COCHRAN [presiding]. The Subcommittee will please
come to order. I apologize for the interruption of our hearing, but
it was probably nice to have a little break.
I know other Senators have other questions, and while they are
coming back from the Senate floor, from this vote that weve just
 32

had, let me ask Mr. Dorfman this question about the APSTAR 2
launch failure analysis. I talked about that some before yielding to
other Senators for their questions.
And in the lessons learned section of the launch failure analysis,
there is this quote, and Im going to read it: It also appears that
HSC,thats Hughes Space and Communicationshas limited
understanding of CALTs,thats Chinese Academy of Launch
Technologyreal capabilities. For example, in the area of aero-
dynamic buffeting analysis loading, they are in the launch busi-
ness. They know their job, and its their problem. Cannot be an ac-
ceptable position in future use of Chinese launch services.
It raises the question in my mind: What does it mean? They are
in the launch business, they know their job, its their problem, can-
not be acceptable in future use of Chinese launch services? Doesnt
that really suggest that the problems with the Chinese launch ve-
hicle, which in many ways are indistinguishable from an ICBM,
will become problems for Hughes to help resolve in future Chinese
launches of Hughes-built satellites?
Something, in other words, has to be done by Hughes or by the
United States. You cant just leave it up to China in the future.
Am I correct in assuming thats what that means?
Mr. DORFMAN. Well, this is the first time Ive seen this docu-
ment, Mr. Chairman, so Id only be speculating about what was in-
tended by these statements. I will say the following, because I do
have knowledge at least at a higher level. And that is the issue
with the APSTAR 2 failure was most likely the satellite fairing.
The satellite fairing is something thats unique to launch vehicles
in that it protects the satellite on its ascent into orbit. It has noth-
ing to do with missile launches, for example, which is of course the
concern that all of us have, that there not be any technology trans-
fer to improve missile launching.
So it appears from the discussion here that it probably dwelt on
the fact that the failure of the APSTAR 2 was most likely a failure
of the satellite protection fairing. And I cant comment on the other
parts of that document. I can say, as a general statement, that
Hughes is also not knowledgeable about satellite fairings, so we
would be depending upon the Chinese to solve that problem, if they
did solve that problem.
Senator COCHRAN. It seems like its just the opposite, that you
cant depend upon the Chinese to solve the problem. Somebodys
got to do something about it.
Mr. ARMSTRONG. Let me just put it in context, not that I am
above in terms of understanding fairings. But I remember back
then, there was this big dispute, and the Chinese were pointing to
Hughes that our satellite caused the explosion. And he was saying,
that just doesnt make sense. And they were doing technical work
on the satellite, to determine, how could the satellite possibly have
caused this explosion to happen.
And although Ive never seen this either, I might speculate that
whoever wrote this was quoting the Chinese, who are saying, its
your fault, Hughes, that this happened. And that they were saying
about themselves, the Chinese, that theyre in the launch business
and they know its their job, its their problem, and theyre going
to blame Hughes, its their job, theyll blame Hughes.
 33

Senator COCHRAN. So there was some question of liability, then,

in effect? Or who would bear the financial consequences of the
launch? Was that at issue at all in this?
Mr. DORFMAN. Well, I can tell you one thing that resulted from
that is, we have an agreement, an option for future launches. But
from a business practice standpoint, we have said that there has
to be a proven success rate before well launch. That doesnt mean
were helping them figure out how to solve the problem. It means
that were asking them to demonstrate they can indeed successfully
launch.
These problems have to be fixed by the launch vehicle provider,
and all systems. Theres problems with European satellites, too,
and we expect them to fix their own problems. And thats the situa-
tion we have today with the Chinese launch vehicle. We have a
contract, we have a right to buy more launch vehicles, but only
after they prove that they have reliability.
Senator COCHRAN. Theres another question or two on this sub-
ject that Im going to ask. We were talking about the Loral-led
launch failure review, that was really caused by the insurance car-
riers who were sustaining the risk of failure, in effect insisting that
there be an investigation to determine what caused the launch to
fail. And expecting that somebody was going to do something about
that.
How does China in this situation improve its likelihood of success
without the benefit of advice or assistance from some outside
entity, whether its Hughes or Loral or someone whos technically
capable of giving them advice about how to improve their launch
vehicles? Isnt it something that just necessarily follows from that
exercise?
And the insurance company had to be told by somebody that the
problem had been fixed, or its less likely in the future that this
is going to happen. As a practical matter, isnt that correct?
Mr. DORFMAN. To answer that question, I think it would be use-
ful to go back to what happened in 1996. As you know, there was
a failure of a launch of an Intelsat satellite. And the launch vehicle
went out of control very early in the mission.
The Chinese did their internal inquiry on the cause of failure.
And they went to the insurance company and said, here is why this
launch vehicle failed, and its something we intend to fix before our
next launch.
Hughes had nothing to do with that launch. It was a Loral sat-
ellite launched for Intelsat. So we really werent involved. But the
insurance company said, in effect, we dont trust your conclusions.
Theres been too many failures. Wed like to subject your conclu-
sions to an independent review committee to validate that, your
conclusion. And such an independent review committee, called the
IRC, was formed.
Loral, because it was their satellite, assumed leadership. They
asked if Hughes would participate. On balance, I wasnt enthusi-
astic about it personally. But on balance, we had the insurance
companies, which were important to us. We had the Chinese and
some agencies of the Chinese government were in the process of
buying Hughes satellites.
 34

So we said we would participate. I accepted that with the under-

standing our only role was to look at whether or not the Chinese
evaluation was something we could agree with, and really whether
the data they presented was consistent with their conclusions.
And thats what happened. And our people, who are pretty well
versed in export controls, sat in on these meetings. It was really
relatively short compared to the ordinary failure investigation. It
was just a few meetings.
And the report, which was inappropriately released prior to State
Department approval, I think Loral has voluntarily disclosed that
to be the case, was in essence a statement that the reviewers
agreed with the data that was presented to validate the Chinese
conclusion.
That was the practical matter, sir. And the people that we sent
to participate really werent launch vehicle experts, probably
couldnt have contributed in any even. But they were there to do
nothing more than look at the data.
Senator COCHRAN. In connection with the licensing process, weve
heard from agency witnesses who told us about the practical ways
the process works. And Ive heard you both describe it today in the
context that both the State Department and Defense Department
have a role to play in the review process. And if they disagree with
the issuance of a license then they have an opportunity to say so.
And that can be appealed.
And as a practical matter, in the case of Tiananmen Square
sanctions, it can be appealed all the way to the President, whos
got to find that its in the national interest to give a waiver.
So there are two kinds of processes at work here, the licensing
process and then the waiver process, to get around sanctions that
may have been imposed. But what happens as a practical matter,
according to Defense Department witnesses who testified at our
last hearing, is that its designed to keep dissent under control and
to prevent it going up the ladder.
You have a certain period of time within which to voice an objec-
tion. And if youre not satisfied and cant work it out with those at
your level, to go to the next level, youve got to act pretty quickly,
get a letter signed, sent up the line.
Anyway, after we heard the details about this procedure, some
serious questions arose as to whether this really gives Defense and
State equal opportunity to analyze and actually make their views
known and to have any influence in the process. The Department
of Commerce really does dominate the process, the procedure. And
the impression I get is thats what you wanted, thats what the in-
dustry wanted in the beginning.
And in connection with communications satellites, its a very
compelling and persuasive argument that you make that this is
harmless communications, like a telephone line system. You can
put the quarter in the slot, you ought to be able to make a call.
So whats the harm in that. And thats easy to understand.
But I guess we get to the problem of embedded technology. There
is some question about whether the encryption information in one
of those failed launches was actually ever found, and did the Chi-
nese end up with that. I think one witness said everything pretty
well burned up. And it wouldnt be useful and wouldnt be helpful
 35

to anybody, and you wouldnt notice it if you found it, you wouldnt
even know what it was.
Well, I dont know that well ever find out the real answer to
that. But the other issue that I want to raise now is, we heard re-
cently that the Chinese military has had a breakdown in its own
communications system, and that one of these satellites is going to
provide an opportunity for the Chinese military to reinvigorate and
bring up to higher standards its own communications capabilities.
And here we are permitting an export of a communications system
that is certainly going to be militarily useful to the Chinese.
The question is, does that threaten our national security? Does
that put at risk the security of American citizens?
Im not capable of making that judgment, but I dont think the
Commerce Department is, either. Now, maybe the Defense Depart-
ment would have a better understanding of how communications
capabilities can be used, without which you couldnt operate an
intercontinental ballistic missile system, or a command and control
system. I dont know the answers to that.
But I would trust somebody, I think, from the Defense Depart-
ment, to make a judgment on that issue. Not somebody from the
Department of Commerce, necessarily.
Am I being unrealistic in making that assumption about a so-
phisticated new communications system for the Chinese military to
use?
Mr. DORFMAN. Mr. Chairman, Id like to make one comment
there. Its possible that the Chinese military will be using commu-
nications satellites, commercial communications satellites. But its
also likely they will be using the telephony system, for which
Lucent and others are providing telecommunications capability for
via line. Its also likely that they will be using cellular systems that
Motorola is building.
So I want to make one point that I made to Senator Thompson,
which is why select satellites as the thing to worry about? I think
youve got to really at that point in time talk about the communica-
tions infrastructure that is being commercially marketed in China,
which goes well beyond just satellites. Because the satellites are,
I mean, it may be Im doing ourselves a disadvantage for making
it seem so simple, but basically, they are communications switches,
just like the switches that are on the ground. The only difference
is youve got to get them up into orbit on top of a rocket.
So I would first start off with saying, I dont think its proper or
appropriate to pick just on satellites for the issue that you raised
about the Chinese military using commercial communications tech-
nologies.
Senator COCHRAN. Mr. Armstrong, do you have a reaction to
that?
Mr. ARMSTRONG. Steve makes, of course, a very valid point. I
happen to be in the business of cellular today, and lots of wires
today. I think I can tell you, Mr. Chairman, from being in both
businesses, his observation is right on the point. All of these tech-
nologies are commercial technologies. I think as you said, if a gen-
eral or soldier, let alone a student or a scholar, can put a quarter
in, they can use any one of them.
 36

As far as the Defense Department review, I really hope you take

from both our testimony that we have no objection at all to any
level of Defense Department review of any licensing process. From
the outset, I have tried to make that clear, on my calls and on my
questions. I think thats why there was support.
And second, if there is something you found in this process thats
not working, then we ought to fix it, we ought to tighten it, we
ought to make it work. Just dont put it back on the munitions list.
Senator COCHRAN. I understand, too, from Mr. Dorfmans state-
ment, that there is a pending request for a license that relates to
the APMT license application.
Mr. DORFMAN. Yes, sir.
Senator COCHRAN. My understanding is theres a question about
whether its a renewal of an existing license that was issued in
1996, or whether it is really in effect an application for a license
of a new satellite. Tell us about this and whether that has any-
thing to do with this new regulatory regime and process. Wasnt
this satellite changed and shouldnt it require a new license?
Mr. DORFMAN. Yes, sir, and it does require a new license. I want
to make that clear. We have applied for a new license. The only
point I would make is the critical issues on that satellite have
hardly changed at all.
For example, in the original license which was approved, there
was a 12.25 meter antenna that was on board the satellite. Thats
a major item, because its one of the nine items on the list. So we
went to the State Department to get approval to proceed with that
antenna and start having design reviews with the APMT customer,
which includes Chinese.
And they approved it. We had a process and approval for pro-
ceeding on with that design, and the design reviews for that sys-
tem. Then as part of the design process, we made changes which
I would like to describe to you as insofar as the items on the muni-
tions list, the changes were almost nothing. The changes were
mostly on the satellite structure and the satellite portion of the
system, the bus, the power.
And that was designed to make it compatible with the other sys-
tem, which was purely a commercial interest in making all the sat-
ellites the same for the Mid-East, for Africa, for the APMT. This
was just a practical consideration.
We made those changes, and to the credit of our people, they im-
mediately displayed these changes to State Department and Com-
merce, and applied for a new license, even though I believe, and
we believe, that the changes are, insofar as sensitive technology
practically none. And were now awaiting the granting of that li-
cense.
Im concerned because State Department and Commerce and the
other departments are watching this hearing. And in fact, many of
them are participating in presenting data in this hearing. And this
has clearly slowed down the granting of the license.
Now, Mr. Chairman, youve got to understand the practical busi-
ness relationships we have with every customer we supply inter-
nationally. Every contract we negotiate has in it a clause which
says, you, Hughes, and I think the same thing will probably apply
for Lockheed Martin and Loral, are responsible for getting all the
 37

U.S. licenses necessary. And if you dont do that, you default. That
means we give back all the money.
In each case, we say, this is an unreasonable request, we cant
afford to take that much risk, and they consistently, every cus-
tomer says, in the U.S. Government we cant depend upon you get-
ting the licenses, theres been too much problem in the past. This
is one of the barriers that both Mike and I alluded to. And its ex-
acerbated when its in the Department of State and the licensing
is part of an instrument of national policy, which is appropriate
when its in the Department of State.
So we finally agree, in every instance, we have to agree, OK, its
reasonable that we take responsibility for the licenses, if we dont
get them, we default. We were in a situation like that back in 1993
or 1994 when Mike was properly advocating the licensing of
APSTAR 2, and were in the same situation with APMT, the same
exact situation. If we dont get the license in a fairly short period
of time, we are in serious trouble, from a business standpoint. Its
possible that we will have to default.
And that means jobs, it means damage to Hughes shareholders.
And it likely means the job is going to go to the Europeans. Thats
why Im concerned about that particular APMT program. And I
hope that the State Department and the Commerce Department,
while this group is considering what to do, proceeds with business
as usual and grants us a license, which I think on the surface of
it should not be a problem.
Senator COCHRAN. At this point, this is in the hands of the regu-
lators at the Department of Commerce, I presume?
Mr. DORFMAN. No, this is specifically Department of State. Thats
the area. This is on the list of nine items that we said. So we go
to the Department of State. Recall, this still is an interagency oper-
ation. And so all the appropriate agencies get involved. Its under
the leadership of the Department of Commerce, but everybody par-
ticipates, theres a process, and everybody has the opportunity to
participate.
So this is under John Holum, who I think testified not too long
ago. And so it is at Department of State.
And Mr. Chairman, if youll permit, because I want to tag onto
something that Mike Armstrong said, which I also passionately be-
lieve in, were learning as we go about the system. I believe there
are improvements that can be made. I suggest the way to improve
the system is not to transfer back to the State Department and put
it on the munitions list. I think the munitions list is the thing that
concerns me and Mike also the most.
Fix up the problems with the system now rather than changing
it.
Senator COCHRAN. You may have seen an article that James
Baker wrote on July 5, printed in the Washington Post.1 The sub-
ject is Blueprint for a China Policy. A copy is being handed to you
and will be included in the record. He talks about the different as-
pects of current policy and the commitment to engagement with
China, rather than isolation or containment.
1 The article from the Washington Post appears in the Appendix on page 68.
 38

And he supports that engagement commitment, but he also con-

cludes that many in Congress and various interest groups, particu-
larly on the left of the Democratic party and the right of the Re-
publican party when they talk about containing rather than engag-
ing China, are trying to find an enemy.
But then he concludes by saying, the President must reverse his
highly questionable decision, made against the express counsel of
his Secretary of State, Secretary of Defense and Director of Central
Intelligence, to vest in the Department of Commerce lead agency
authority for satellite launch exemptions relating to China.
I think the interesting thing here is that hes not criticizing nec-
essarily the export of communications satellites, which is whats
been the subject of much of your statements today. But hes talking
about the launching of U.S. satellites, and that is a different thing,
it seems to me.
Couldnt we make as a part of our national priorities the develop-
ment of more launch capacity here in the United States? Thats
been brought up, I think Senator Cleland was discussing that when
we went over to vote. And Mr. Armstrong talked about the fact
that we must do more in that regard.
Do you know of any movement in the Presidents Export Council
or within U.S. industry to get behind a new commitment to develop
U.S. launch capacity, so we dont have to run the risk of turning
over the launching of U.S. satellites to other countries?
Mr. ARMSTRONG. Mr. Chairman, I can make a couple comments,
please. I certainly wasnt even given information or insight as to
how the vote took place around the Presidents table. I was led to
believe, however, with all the interaction I had with the Secretary
of Defense, Dr. Perry, and Jim Woolsey, the Director of Central In-
telligence, that they very much supported the transfer to Com-
merce, and worked hard to make their presence in the process the
appropriate presence.
So I would take issue with this author, although Im sorry I
never saw this article or this statement. On the other hand, I
would stand corrected if that table, indeed, those gentlemen ex-
pressed a different opinion than I was led to believe that they had.
Second, Steve and I called on a lot of people. Some people think
we called on too many people. But theres a lot of people on an im-
portant issue like this who should be part of the process. I did my
best to call on all of them.
And during that process, there was a terrific debate in the gov-
ernment and in industry that the satellite industry was going to
go into decline after the turn of the century. This was back in 1992,
1993, and 1994. And in fact it was a declining industry.
What really needed to be done was not promote investment in
more, but protect the launch capability of what was here.
We could not convince people otherwise. And so we took it on our
own risk, our own balance sheet, our own board of directors, to
make those ten PACs. We went to McDonnell Douglas, and they
would not have invested in the Delta 3 without the commitment for
10 launches. And Boeing thought it was a terrific idea to have a
Sea Launch, but they had to have an underpinning order.
And we put our money on the table and we took the risk that
we were right, that we needed launch capability and the country
 39

needed launch capability and we would commit our company to

that. And Ive seen no movement since then.
Mr. DORFMAN. I would add that we continue to strongly support
the U.S. Government investing in expendable launch vehicles. I
think its prudent for two reasons. One is, I think its important for
the U.S. Government program, that the U.S. Government have an
efficient, reliable, affordable, available launch vehicle capability.
That position, which I have personally advocated for about 10 years
now, since shortly after the Challenger failure, has not gotten a lot
of encouragement until recently.
Thats why we went to McDonnell Douglas directly and to others
directly, to start taking the demand capacity curve to be in balance.
Because we still have more demand for launches than capacity.
So I would recommend the Senators here support, when it comes
up, for funding for the EELV, the expendable launch vehicle that
has been proposed under Secretary Widnalls leadership, and Art
Money now in the Department of Defense, to come up with a next
generation launch vehicle that will have the characteristics that I
described. And we are very strongly supportive of it, were in dis-
cussions with Boeing and Lockheed Martin to encourage them to
go ahead with this new investment, and we are even discussing ad-
ditional commitments beyond what we have now as a possibility to
do our part.
The plan is that there be government investment and commercial
investment. The government investment is needed, and the govern-
ment will be a beneficiary. Our role is to make sure everybody un-
derstands theres a commercial application for this launch vehicle.
After a long time, I finally decided that the reason the govern-
ment was reluctant to invest in an expandable launch vehicle was
because the benefits to the government would come later. The in-
vestments would be now, and would be substantial. The benefits
would come to government programs later, and the existing capac-
ity was probably adequate for all government needs. And you know
how difficult it is to spend money now to save later.
So we brought up the additional issue of making U.S. expendable
launch vehicles competitive in an international environment, so it
wasnt 30 or 40 percent of the world market, but it would get to
the stature of the satellite industry, which would be 70, or 75 per-
cent, which I think is doable. That game is not over with, but its
in process.
I think the Senate and the House should support DOD in invest-
ing in this next generation launch vehicle, which they call the
EELV. And I think that will bring more launches home to the
United States. And if the characteristics or the virtues of the sys-
tem thats been described are there, I think both the U.S. Govern-
ment programs and the commercial programs will be a beneficiary.
So we continue to support this program. I would point out the
program is presently going to come on line in the year 2002 to
2004. We started our advocacy in 1988, shortly after the policy de-
cision that caused us so much trouble in regard to the shuttle.
Thats taken a long time. We could not afford to wait, our business
would be dead if we waited that long.
So we needed to go, and have gone to launching around the
world, until the demand-supply gets more in balance.
 40

Mr. ARMSTRONG. In fact, following up on Senator Clelands point

about back when the Challenger failed, that redefined the launch
industry in the United States. As a consequence, the French
stepped in and made significant investments with the Arianne. I
know when I left Hughes, they were like 60 percent or so of the
launch capacity, and really had the most advanced technology at
the time.
So somebody did step in and make the investment.
Mr. DORFMAN. The Europeans have put in probably $6 billion or
$7 billion of investment for its next generation launch vehicle,
which is called the Arianne 5.
Senator COCHRAN. Senator Cleland.
Senator CLELAND. Yes, sir, thank you very much, Mr. Chairman.
Fascinating discussion. I have to put it in context, because I was
just a young sophomore in college when I watched that little Atlas
booster go up down at Titusville that had John Glenn on it in Feb-
ruary 1962. And its quite ironic to be sitting in the Senate now
with him going up on the crew of Discovery 7, all seven astronauts
at the same time in one vehicle.
So as we talk about satellite technology, I still have to pinch my-
self sometimes that we regard it as almost a happenstance. It
hasnt always been that way. And it was this government that pio-
neered the technology here.
But as I understand it from your discussion, basically its the pri-
vate sector now that is bearing the brunt, taking the risk of filling
a need, a demonstrable need out there, if we are to keep up with
our role in the world as preeminent in terms of technology and
telecommunications. Is that correct, the private sector is now bear-
ing that burden?
Mr. DORFMAN. I would say the principal burden, yes.
Senator CLELAND. Id like to shift to just two more points for
clarification. One is the whole concept, the question of satellite or
payload and the rocket itself. If we acknowledge that we should
have more lift capacity, more launch capacity, theres an obvious
need to this Senator that we need that, not only for trade, but for
our own national security purposes as well.
But if someone else launches our payload, or our domestic pay-
load from a domestic company here, do you feel that theres enough
guarantees basically on a commercial satellite launch that it
doesnt risk national security or threaten commercial espionage or
shall we say, security leak that might be possible? Do you feel that
the payload itself is separate enough and protected enough from
the rocket that all of a sudden, you cant get technology embedded
secrets or whatever in the satellite, and all of a sudden it transfers
to the rocket, and the Chinese have their whole missile capacity
perfected?
Is that easy to do? Is that hard to do? Or do we have enough con-
trols, the way you see it, Mr. Armstrong, start off if you will.
Mr. ARMSTRONG. Well, you can start off with me and I can tell
you what I have learned and known in my 6 years at Hughes. And
sitting next to me is a man who has built them all his life and
knows them so much better.
But absolutely, Senator, I checked that out both by the review
that I mentioned in my testimony, about the security on a satellite
 41

when it goes to either China or Russia. Its locked, its crated, the
crate is locked, its packaged in a way that its not penetrable. We
put Hughes security people with it. Its under surveillance. It goes
into a building that is under lock. It has television cameras on it
24 hours a day, 7 days a week, I understood.
I also visited the floor many times of our satellite manufacturing
facility, and observed the embedded technology. And I cannot
think, I cannot imagine a way that the embedded technology could
be penetrated. The satellite is moved from the building under
Hughes surveillance to the launch site under our surveillance dur-
ing its mounting. Of course, then its locked in, and once its up
there, its up there.
So I would answer your question very simply, I dont know of any
way for embedded technology to be exposed to national security.
Mr. DORFMAN. Let me give a slightly different perspective with
the same conclusion. The sensitivity is in the detailed designs and
the processes for making the various components. By observing the
satellite, it is impossible to figure out how to design one. You might
get a few clues by looking at it, but those clues are not more than
you can get by reading the journals, the trade journals associated
with the business.
That is to say, Aviation Week, as an example. On their cover and
in their magazine, it often has pictures of our satellites and other
satellites. And you can look at the pictures and you can get about
as much detail as if you walk through our facility or look at it at
the launch site.
So you can get a feeling with the satellite, its a box and there
are solar panels that are folded in, and there are reflectors folded
in. But how to design those devices and the processes, the very so-
phisticated processes that design reflectors or traveling wave tubes,
you cant deduce that by looking at the satellite.
Now, in order to assure that nobody pokes around, steals some-
thing, we have guards. They cant do that, theres people there 24
hours a day, making sure that nobody has access to the satellite
to try to steal or get a closer look at any of the components. To be
frank with you, even then I think it would be difficult to capture
the design details youd need to build a satellite.
Now, I think everybody focuses on missile technology. There is
nothing in the satellite that teaches you how to do missile tech-
nology. Theres nothing on a satellite that does that. And as I said
earlier, theres probably more sensitive technology on the inertial
measurement unit in the Boeing aircraft that fly all over China.
Its been a good source of business for Boeing and Airbus and
McDonnell Douglas before they folded. Those have very sophisti-
cated devices. You can touch them, you can take them apart. They
have full access to them for the whole time.
The satellite, the Chinese see it, or whoevers launching it sees
it, you put it on top of the launch vehicle, theres a very simple at-
tachment process, and its gone in space. You have no access to it.
No way of touching it, feeling it. You have ways of sending com-
mand signals to it, but thats it.
And since I mentioned command signals, I also want to talk a
little bit about encryption. Because there is encryption on some of
our satellites for commanding purposes. And some people dont
 42

really understand what the substance of the encryption issue is.

The concern that people have about encryption is when youre
encrypting data, data usually goes at a very high data rate, and
security systems have that kind of encryption.
The encryption for command is much simpler, and the data rate
is very slow. Its bits per second to issue commands. And there is
encryption there for a specific reason. Operators of satellites dont
want somebody else to control their satellites. Thats why an
encryption chip gets in a satellite. Its only a distant cousin to the
encryption that people worry about for national security purposes.
Senator CLELAND. If I could just shift now to how the U.S. Gov-
ernment in its function of licensing or certifying commercial sat-
ellites to then be launched by foreign nations, by that lift capacity
that other nations have, I wonder, are we in just a catch22 here?
I mean, between State and Commerce, are we fighting the wrong
battle here, Mr. Armstrong? It seems to me theres back and forth
and kind of who shot John.
Given the fact were all interested in national security and no-
body wants to jeopardize it, were all acting in good faith, and
youve dealt with this process for a number of years and are inti-
mately familiar with it, given the realities that we have, that we
have to depend on other nations to launch some of our satellites,
how do you feel about the present process, and are there some
areas that you might want to see it strengthened?
Mr. ARMSTRONG. Im 10 months old, and sometimes out of date
if I am. I left Hughes in October of 1997.
But in hindsight, I think that the licensing process between, that
I understood when I left with Commerce on the launch licensing,
was adequate and the Defense Department, I thought, and the
State Department, as Steve was referencing in the APMT case
today, has full access to the license review process. And so if there
is something in that process that needs to be fixed, Im not aware
of it, but it ought to be fixed.
Now, what seems to have happened is the launch failure review
process. It appears to have worked in the 1995 case with the
APSTAR 2. The right processes were followed, the right agency
designate was asked for review, and the right approvals were given
before the report for insurance purposes was let out.
But in the case of the Loral situation, it exported a flaw. And
that is that theres not enough oversight in the launch review proc-
ess. And I respectfully submit it ought to be fixed, and that opening
ought to be closed.
Senator CLELAND. Mr. Dorfman, any suggestions on what you
know about the current process, given our realities, and any way
that youd like to see the process strengthened, tightened, or im-
proved?
Mr. DORFMAN. Senator, I would like to see the DOD witness all
launches, so that removes any doubt there would be an inadvertent
technology transfer. I dont think there has been any, but this
would make us all feel more comfortable, including this Sub-
committee.
And I think we should have a special process for launch review
failures. I think State should specifically be involved, and DOD. I
 43

dont think thats been covered. It was an oversight, I believe, be-

cause nobody anticipated these failures.
Those are two explicit fixes I think could be done either by legis-
lation or by administrative steps. I think we see here an inter-
agency process thats led by Commerce. As you know, all inter-
agency processes have interface issues between the various parties.
Its possible that one issue is that the agencies involved may need
more funding to do their job properly. And I would support that.
I think maybe the Subcommittee should ask the various agencies
the same question that youve asked us, including if maybe a few
more people would help expedite the process. I dont think the baby
should be thrown out with the bath water. I dont think the solu-
tion of putting communications satellites back on the munitions
control list is the way to solve any of the improvements that have
to be made. We think the openness and the speed of the process
and it not being on the munitions control list are important at-
tributes that should be retained. And in that context, to see if we
can improve it. And I think theres at least a couple of improve-
ments that I mentioned.
Senator CLELAND. Thank you very much. Thats an insight.
Senator Levin wanted me to ask just a couple of questions. Mr.
Dorfman, you mentioned in your testimony, I think Im quoting it
right, one less American-made satellite positioned over the globe
means one more non-American made one. You said, I believe this
will damage national security, not enhance it.
Id like for you just to share with us a little bit about what you
mean, and how less secure are we if one less American-made sat-
ellite is in operation. Just fill us in a little bit there.
Mr. DORFMAN. Sure. Id first like to start by saying that satellite
communications is currently viewed as a very attractive business.
We find more and more people anxious to get into it, which is going
to make the competition even tougher. That includes countries.
So even though I focus on Europe and in Europe theres two very
powerful consortiums, and this is really analogous to Airbus, the
Europeans are forming consortiums, and they are trying to get in-
creased market share. One is Matra and DASA, and its a British-
French-German consortium. The other one is Aerospatiale and
Alcatel, very active, very capable, strong support from their govern-
ments.
But thats not the end of it. The Japanese are also seeking to be-
come prime suppliers of satellite communications, and theres no
question in my mind that both the Chinese and the Russians would
like to have their aerospace industry be competitive in this field.
So its not just the Europeans. I think theres lots of people inter-
ested in this area.
And so now I want to talk about national security at several dif-
ferent levels. Theres one that everybody understands, that in our
new environment, the strength of the economy is important. And
the ability for Americans to have knowledge-based high technology
jobs is going to be a way for us to maintain our standard of living
as we get more and more in a global economy.
I think the kind of jobs that Hughes and Loral and Lockheed
Martin are doing are those kinds of jobs. We want to have a good
balance of exports to imports. And even though the industry has
 44

been buying launch vehicles from the Chinese, we are still in a po-
sition where Chinese purchases of satellite communications equip-
ment from Hughes and others exceeds western purchases of launch
vehicles. That is to say, we have a positive balance of trade in
China and certainly around the world.
So I say from a national economy standpoint, and that definition
of national security, its also important that we have American sat-
ellites. I think its important for national pride. When I got to
Narita airport, as many of you do, the place is filled with Boeing
airplanes. I love it. And I count those versus the Airbus. I think
a lot of Americans feel that way. So theres a kind of national pride
issue.
And then we get to the military. And its an interesting situation
here, and 10 or 15 years ago, the most advanced technologies were
developed by the military and migrated to commercial. The mili-
tary procurement process is admittedly, by the military, and Bill
Perry and Dr. Kaminsky and others tried to change it, its being
changed but its so slow that the speed of commercial had us really
doing more technology development on the commercial side than on
the military side.
So our space and communications company, which in 1980, mid-
1980s, was about 75 percent government, 25 percent commercial,
its now almost turned around completely. And our commercial sat-
ellite business is actually supporting, in that sense, our military
communication satellite business and our government business.
So if that goes down, I think it will weaken our ability to support
the U.S. Government needs for communications satellites. So thats
what I mean in that simplistic statement that its bad to reduce the
number of U.S. satellites over the globe.
Senator CLELAND. Powerful statement. Thank you very much.
Just one more question Senator Levin wanted me to ask. Can
you ever export a satellite with one of the nine characteristics with-
out having a license from the State Department for the data? Ap-
parently there are nine basic qualifications, I guess, on their muni-
tions list. And if you trigger one of the nine, you have to have a
license from the State Department. Is that my understanding? Am
I understanding correctly?
Mr. DORFMAN. Somebody told me never to say never. And this
is an area where I dont have expertise. But I can say that to re-
lease any data on those devices, we ask for and hopefully receive,
a State Department license to release any data.
Senator CLELAND. Thank you all very much. Youve been very
helpful to me in helping me understand this complex issue, and we
thank you for coming.
Mr. Chairman, I have no further questions.
Senator COCHRAN. Thank you, Senator Cleland, for your partici-
pation in this hearing, and your assistance in helping us develop
a record on which we can make better policy decisions on these
issues.
Id like to thank both of our witnesses today and all of our Sen-
ate colleagues for participating in what I think has been a very
useful and informative hearing. We have been able to determine,
I think, how we can better ensure that U.S. national security is
 45

properly safeguarded when our aerospace industry sells and

launches satellites abroad.
I appreciate the witnesses providing us with industrys perspec-
tive. We all know that trade is a very important interest of the
United States, and it must be considered as we make decisions in
the national interest. But trade is not our only interest. Our Na-
tions security interest cannot be sacrificed when a conflict arises
between those interests.
Mr. Armstrongs suggestion that more investment needs to be
made in the space launch capabilities of the United States must be
given careful consideration by this Congress. And Mr. Dorfmans
plea that we support the expendable launch vehicle appropriations
has to be carefully considered as well. Along with his suggestion
that Department of Defense monitors ought to be involved in the
processes leading up to a foreign launch, and in the event of an ac-
cident investigation.
Weve completed four hearings now over the last 3 months on
various issues related to the export from the United States of com-
mercial satellites for launch in foreign countries. Weve learned
that one, reliably launching commercial satellites in a country like
China requires the perfecting of the space launch vehicle that car-
ries the satellite into space.
Two, there is substantial applicability of space launch vehicle
technology to ballistic missiles. The CIA gave us this information,
which we displayed in an open hearing with charts. Three, there
is great incentive for industry to ensure that space launch vehicles
work before the launch, and in the event of failure, industry has
participated in accident investigations without U.S. Government
agency participation in some cases, or supervision.
National security interests have been given lesser weight in the
administrations licensing process. As a matter of fact, the Depart-
ment of Commerce has been given the challenging and conflicting
task of both export control and export promotion. Ultimately, our
export control policies and processes must operate to protect the
national security interests of the United States. The deficiencies we
have identified show that changes in the current policies need our
immediate attention.
The hearing is adjourned.
[Whereupon, at 5 p.m., the Subcommittee was adjourned, to re-
convene at the call of the Chair.]
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